On 6 May the
International Monetary Fund published the text of a Concluding Statement
drafted on 3 May at the end of a staff visit to Greece Greece Greece
Greece – 2013 Article IV
Consultation Concluding Statement of the IMF Mission
May
3, 2013
1. Greece
is making progress in overcoming deep-seated problems in the midst of a very
serious and socially painful recession. The adjustment challenges facing
Greece in 2010 were daunting, with fiscal and current account deficits both
well into the double digits, reflecting runaway increases in public
expenditures and the emergence of a large competitiveness gap in the years
following the adoption of the euro. For any country belonging to a currency
union, addressing dual imbalances of this magnitude would carry very high risks
to growth, as recognized at the outset. In the event, the recession in Greece
has been much deeper than expected. But Greece’s achievements must also be
recognized:
· Progress on fiscal adjustment has been exceptional by any
international comparison, with the primary balance set to have cumulatively
improved by 10 percent of GDP by end-2013, amid a contraction in GDP of more
than 20 percent.
·
Greece has also made a significant dent in its
competitiveness gap. Far-reaching labor market reforms have helped to realign
nominal wages and productivity at the enterprise level. We estimate that the
competitiveness gap as measured by Unit Labor Costs (ULC) has been reduced by
close to two-thirds since 2010, while the current account deficit has come down
cumulatively by about 10 percent of GDP.
·
Financial sector stability has been preserved, despite large
losses associated with the debt restructuring and a sharp rise in NPLs
associated with the deep recession.
2. These
achievements have been facilitated by unprecedented support from the
international community, including €173 billion to date from Greece’s European
partners. This has significantly cushioned the adjustment need, preventing
what would otherwise have been much more serious social hardship, while
containing negative spillover to the rest of the euro area. The achievements to
date are evidence of a very strong and persistent determination on the part of
Greece and its European partners to do whatever it takes to restore Greece to a
sustainable situation inside the euro area.
3. However,
insufficient structural reforms have meant that the adjustment has been
achieved primarily through recessionary channels, with unequal distribution of
the burden of adjustment. Three problems stand out:
·
Very little progress has been made in tackling Greece’s
notorious tax evasion. The rich and self-employed are simply not paying their
fair share, which has forced an excessive reliance on across-the-board
expenditure cuts and higher taxes on those earning a salary or a pension.
·
While labor market reforms are causing a notable decline in
nominal wages, this has only to a very limited degree been reflected in lower
prices, because of failure to liberalize closed professions and more generally
open up to competition. This is another reason for why too much of the burden
has so far fallen on those earning wages and pensions.
· While the rebalancing of the economy has been associated
with a surge in unemployment in the private sector, not least among the young,
the over-staffed public sector has been spared, because of a taboo against
dismissals.
Decisive
corrective actions are needed in each of these areas to promote an early supply
response and achieve a more balanced distribution of the burden of adjustment.
The mission welcomes that the government is refocusing its program in
recognition of these problems.
4. Major
fiscal challenges remain. With no more room for tax increases or major cuts
in discretionary spending, the government has been forced to focus on socially
difficult cuts to wages and social transfers. The fiscal program for 2013–14 is
unequivocal evidence of the government’s determination to meet its commitments
in the fiscal area. Greece’s European partners have responded by agreeing to
reduce the medium-term primary balance target from 6½ to 4½ percent of GDP and
to length the adjustment period to 2016. But Greece will still need some
further structural fiscal adjustment to reach its medium-term fiscal target.
The key challenge is to define a way for the Government to achieve this while
adhering to its promise to avoid further across-the-board spending cuts. Three
key issues must be addressed:
· Tax administration reform. The government’s medium-term
program assumes an improvement in tax collection by 1½ percent of GDP.
Substantial technical assistance has helped give the tax administration the
technical tools it needs to succeed, but this target remains very ambitious
against the backdrop of the disappointing progress in this area so far. To
finally deliver, deeper political commitment to tax administration reform is
critical. To insulate the administration against what is still pervasive
political interference, a key step over the next year will be strengthening its
independence, by giving it new powers to manage its personnel and budget.
Recent changes are an important step in this regard.
·
Public administration reform. The plan is to primarily achieve
medium-term targets for reduction in staffing levels through voluntary
attrition. This is understandable. However, it is not credible without some
limited mandatory redundancies. Thus, while projections suggest that attrition
will be just about enough to meet medium-term staffing targets, the provision
of important public services is already hampered by lack of qualified staff in
key areas, like banking supervision and tax administration. Mandatory
redundancies that provide room to hire new, well-qualified and motivated staff
will thus need to be a key component of the plan for modernization of the public
sector, and in the process lend credibility to the policy of relying primarily
on attrition. The taboo against mandatory dismissals must be overcome.
· Preserving and enhancing the social safety net. The government has kept its
adjustment policies progressive, but there is a need to go beyond this to
strengthen specific features of the safety net, to assist those most affected
by the crisis. Job training programs and income support programs for the
unemployed both need to be geared up, leveraging European Community funds where
available.
5. Effective
financial intermediation is crucial to contribute to a strong recovery. The
program’s bank recapitalization framework is set to deliver a fully
recapitalized system by mid-2013, and banks should be in a position to support
a gradual recovery in credit as deposits and wholesale market access returns.
The reduced sovereign-bank link—banks now have little Greek government debt on
their balance sheets—will also help to facilitate a return to market access.
Thus, we expect that the deep de-leveraging that has taken place in recent
years will soon come to a halt. However, serious policy challenges still exist
in this area:
·
A major concern is to ensure that the large injection of
public capital does not give rise to undue government interference and
attendant problems of misallocation of credit. Greece’s experience with state
run banks is very poor. A reinforced governance framework, supporting strong
oversight and supervision, and above all very rapid re-privatization, must be a
critical objective of the strategy for the four-pillar banking system to be
developed by June.
· A key priority for the banking system is to contain and
reverse the mounting tide of nonperforming loans. Working out debts, within the
recapitalization envelope, will help both the banks and the debtors normalize
their activities faster. A more comprehensive debt resolution framework should
be developed and introduced as soon as possible. In this respect, the mission
welcomes the authorities’ commitment to put in place a framework for dealing
with distressed household borrowers.
6. A
strong recovery will need to be built primarily on deepening structural
reforms. The focus should be on invigorating Greece’s export and import
competing industries. This will require a more determined and ambitious effort
to reduce barriers to entry into various markets, including opaque and lengthy
licensing procedures. Moreover, too many assets remain in state hands. The
government’s welcome public commitment to improving the business environment
and accelerating privatization now needs to be matched with results. Achieving
a critical mass of change will be possible only with a broad, forceful, and
sustained political commitment.
7. Attempts
to artificially engineer growth should be resisted. International evidence
is mixed at best on the usefulness of development banks, tax-free zones, and
subsidies (or tax expenditures) targeted at specific sectors. Greece cannot
afford to divert resources to unproductive uses nor to devote limited
implementation capacity to designing and establishing such policies. And in
particular, Greece cannot afford a more complicated tax system, which would
work directly against the crucial effort to improve tax collection.
8. Restoring
growth remains the overarching precondition for whether Greece succeeds.
Looking over the period 2010–2012, the much deeper than expected recession was
overwhelmingly due to a progressive loss of confidence, culminating in acute
concerns about euro exit, as political uncertainty continued to grow, making it
increasingly evident that there was no strong political resolve to stand up to
vested interests fiercely opposed to reforms. This led to a dramatic
contraction in investments not only through poor sentiment, but directly
through deleveraging and an attendant sharp credit contraction. Looking
forward, two crucial considerations stand out:
·
With fiscal adjustment set to remain a drag on GDP growth
for several years to come, the key challenge is to generate the improvement in
confidence needed for a recovery in investment to begin to more than offset
this drag. This cannot happen unless Greece can secure broad domestic support
for the program and the political stability that would come with this. The
lessons of the recent past are that only with full and timely policy
implementation and commitment to the program can the fundamentals for a
recovery be put fully in place and the fear of adverse outcomes permanently put
to rest.
· Greece’s public debt remains much too high, despite the
restructuring of privately held bonds and recent support by official creditors.
It is, therefore, very welcome that Greece’s European partners have now
accepted that Greece could need significant exceptional support on below-market
terms in order to restore debt sustainability and that they have committed to
provide additional relief, if needed, to keep debt on the programmed path, i.e.
to bring it substantially below 110 percent of GDP by 2022. With Greece’s debt
now overwhelmingly held by the official sector, such a commitment is essential
to assure creditors that a credible framework for dealing with Greece’s debt
overhang is now in place.
9. Overall,
while it will yet take some time for the country’s situation to fully
normalize, the government of Greece has come a long way in its adjustment
effort. Adopting the necessary policies for the next leg of the adjustment
effort, which may well mark a turning point for Greece, must take priority.
**********
The mission is grateful to the authorities for the
constructive discussions.
Source:
