ISSN: 2560-1601

Vol. 17, No. 2 (GR)

April 2019

Greece economy briefing: and the IMF economic report George N. Tzogopoulos

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+36 1 5858 690 Kiadó: Kína-KKE Intézet Nonprofit Kft. [email protected] Szerkesztésért felelős személy: Chen Xin

Kiadásért felelős személy: Huang Ping china-cee.eu 2017/01

Greece and the IMF economic report

The post-bailout report of the IMF on the Greek economy shows Greece has achieved impressive fiscal consolidation and gained competiveness. It should seek to change the policy mix to one that better supports economic growth though. Therefore, the country has to carry on with reforms to free up resources to modernize its economy, to invest, to do tax reforms and to restore public spending that has been compressed to exceptionally low level during the economic crisis. It also needs to accelerate reforms in the labor and financial sector. As 2019 in an election year for the country the IMF remains skeptical about the determination of the Greek authorities to respect the post-bailout commitments. Its first post-bailout report is being issued at a critical juncture for the economy of Greece while is attempting to repay the Fund’s loans earlier.

In 2018, Greece exited the bailout and demonstrated a solid economic performance. The government exceeded the primary fiscal balance target of 3.5 percent of GDP and was able to offer a ‘social dividend’. Additionally, growth amounted at 2.1 percent – up from 1.5 percent in 2017 – boosted mainly by exports, a record number of tourist arrivals and higher private consumption. Household spending was supported by declining unemployment and rising disposable income. Additionally, the real estate market started to recover, especially in Athens. Benefiting by the good momentum and the debt settlement of June 2018, the government issued at the end of January 2019 a €2.5 billion 5-year sovereign bond yielding 3.6 percent. This was principally sold to foreign investors.

The question is whether the solid economic performance can continue. 2019 is an election year for Greece. Before elections politicians tend to traditionally deviate from economic targets and make easy promises in order to satisfy their electorates. Prime Minister , for example, has said his administration would not lower a tax-free threshold. He remains optimistic the government will meet its fiscal goals though. And he clarifies any outperformance will be distributed to the public as it happened with the ‘social dividend’ last year. He does not consider this a ‘pre-election gift’ but as permanent relief measures after years of painful austerity. Additionally, Tsipras explores whether it is possible for the country to pay back IMF loans earlier than expected. In so doing, he wants to show to voters Greece is regaining economic autonomy in the post-bailout era. At the time of writing it is unclear whether the Greek Premier will persuade his partners on this theme.

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Almost ten years after the outbreak of the Greek economic crisis different organizations, bodies, or economists do not necessarily agree on their analysis on the Greek economy. A leading research organization, the Foundation for Economic and Industrial Research (IOBE), for example, challenges the view of the government that the national economy will grow 2.5 percent by the end of the year. By contrast, it anticipates growth to amount at 2 percent. In the view of IOBE’s director, Professor Nikos Vettas, the level of investments remains very low. Vettas’ opinion is fair. Delays in the realization of COSCO’s development plan in the Piraeus port outline bureaucracy and political inertia remain serious thorns in the post-bailout Greece.

In March 2019, the IMF published its own report on the status of the Greek economy monitoring progress made but also concentrating on deficiencies. Recent discussions were held from 21 until 25 January 2019. The IMF mission met, among others, with Finance Minister , Central Bank Governor Yannis Stournaras, Deputy Prime Minister Yannis Dragasakis and other cabinet ministers, and staff of their ministries. Greece no longer has a borrowing arrangement with the IMF. Instead, the relationship is centered on two formal consultations each year covering core macroeconomic and financial sector issues. But the Fund’s post-program monitoring was initiated in July 2018 and focuses on risks to Greece’s repayment capacity to it.

The IMF considers Greece’s repayment capacity broadly adequate because of existing lividity largely guaranteed by the cash buffer provided. This cash buffer can allow Greece to service its debt through end-2022 without any further market financing. As far as Greece’s growth is concerned, the IMF anticipates it will reach 2.4 percent in 2019. The estimation is based on continuous strong consumption that reflects higher household income and an expansionary fiscal stance. More importantly unemployment is declining. According to Eurostat, for instance, unemployment in January 2019 was 18.5 percent, slightly up from 18.4 percent in December 2018 but down from 20.6 percent in January 2018 (The number of unemployed people in Greece totaled 873,000 in January. The unemployment rate among men stood at 14.5 percent and among women at 23.6 percent). Additionally, bank liquidity is improving including an ongoing recovery in private deposits and an increase of state government deposits in commercial banks. And sales of non-performing exposures are increasing. Significant gains in competiveness are also evident.

At the same time, however, challenges, the IMF report discusses, do exist. Among others, these include higher imports which offset higher exports, impaired balance sheets of banks and primarily delays in the implementation of structural reforms. In addition, the Fund believes Greece’s efforts to lower non-wage costs, generate investment, and boost productivity and

2 exports remain incomplete. Its attention is also turned towards fiscal risks. These include legal challenges to past wage and pension reforms. For example, an affirmative ruling in a legal challenge to the 2012 pension reform could result in one-off net costs exceeding 3 percent of GDP whereas rulings on public sector wages could add an additional one-off payment of 1.4 percent of GDP. Other risks are the possible realization of fiscal contingent liabilities and pre- election policy pledges. Here, the Fund asserts some recently-announced policy intentions – such as the reduction of property tax and VAT rates and increases in public sector hiring – are not in line with its baseline due to uncertainty about their implementation.

The IMF believes rebalancing the fiscal policy mix to support inclusive growth is required. The focus, the Fund suggests, should be on lowering taxes to facilitate growth, such as distortionary wage and profit tax rates, and to increase efficient investment and targeted social spending. This implies creating space within the fiscal framework agreed with the European creditors of Greece. In this context, it recommends Greek authorities to implement the already legislated tax cuts, reallocate spending toward growth-supporting policies such as investment and tackle persistent under-execution of investment spending. On the same wavelength, it encourages Athens to preserve growth-friendly and socially inclusive expenditures, drawing where appropriate on fiscal buffers and adjusting fiscal targets.

Additionally, more flexible labor market policies should be pursued in the IMF opinion. It encourages the Greek government to re-introduce firm-level flexibility to set labor market practices and take measures aiming to boost investment, productivity, and competitiveness. The Fund considers important the reduction of non-wage costs through, for example, cuts to income taxes and lowering the cost of financing. Furthermore, it recommends the improvement of tax compliance and the acceleration of revenue administration reforms. As far as the financial sector is concerned, it proposes steps such as building up capital to support ambitious non- performing exposures reduction targets, strengthening existing non-performing reduction toolkits, aimed at facilitating private solutions as well as carefully assessing options for state support of system-wide non-performing exposures reduction.

Generally speaking, the Greek government is satisfied with the content of the IMF report on the national economy. But it remains skeptical on some of the Fund’s proposals. For example, it disagrees with the latter’s views on labor market policies and expects stronger wage growth to boost labor productivity via higher labor utilization. The Greek government argues the minimum wage hike will help balance bargaining dynamics and domestic demand. Further to this, the Greek government refrains from lowering a tax-free threshold and does not believe the baking sector in the country remains vulnerable. With reference to the second issue, it does

3 not view co-ordination as a major issue and feels that current plans are sufficient to achieve objectives.

Conclusion

Greece has now entered a period of economic growth that puts it among the top performers in the . The country must now persevere with efforts to address crisis legacies and pursue needed reforms to ensure continued success. Although Greece has no longer a borrowing arrangement with the IMF, the latter is largely interested in the repayment capacity of the former. Its first post-bailout review of the Greek economy serves this objective. In this report the IMF diagnoses many positive developments such as the ability of Greece to obtain a growth rate of 2.5 percent in 2019. It also concentrates on vulnerabilities such as a possible fatigue after years of cost cutting and reform efforts. The IMF recommends more action in enhancing labor market flexibility, in supporting growth and in fixing the banking sector. The Greek governments agrees with many recommendations but remain adamant on its position labor market policies. The next mission of the Fund in Greece will take place this summer, a few months before the national election.

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