BUSINESS

OECD warns of impact on economic progress from handouts

TAGS: Economy

The Organization for Economic Cooperation and Development (OECD) has warned Greece that it needs to stick to agreed reforms and fiscal targets if it wants to maintain current growth rates.

“Deviations from the current medium-term fiscal strategy would undermine gains in fiscal credibility,” the OECD warned in its latest Economic Outlook report.

“Delays in reforms to improve the business environment, competitiveness and banks’ health would create downside risks to the projected recovery in investment,” it added.

According to the Paris-based organization, Greece's economic recovery is projected to maintain its recent pace, with gross domestic product growing at or slightly above 2 percent in 2019 and 2020. In 2018, the economy grew by 1.9 percent, its fastest rate since the start of the crisis, driven mainly by growth in exports and private consumption, though domestic demand is expected to contribute more in the next couple of years, it said.

Greece's primary budget surplus also continued to exceed medium-term targets, reaching 4.2 percent of GDP in 2018, the OECD said, with a boost in VAT receipts from tourist spending and investment under-spending contributing to this performance.

It added that while the 2019 budget maintains the 3.5 percent primary budget surplus target, the government is hoping to lower this target to 2.5 percent of GDP in 2020, funding the difference with its cash buffer.

“Future fiscal measures should prioritize investing in infrastructure and skills, fighting poverty, and improving public spending effectiveness and controls,” the OECD recommended.

It also warned of “risks to expenditure management due to payment arrears and public payroll pressures arising mainly from court rulings,” while stressing that the handout package announced by Prime Minister Alexis Tsipras earlier this month “will reduce tax revenues, mainly by lowering selected VAT rates, and raise spending, mostly on pensions, from 2019.”

“The primary budget surplus continues to exceed medium-term targets, access to international bond markets is improving and cash buffers are substantial,” the OECD said.

However, it added, “safeguarding fiscal credibility requires continuing to meet medium-term fiscal targets.”

The report stressed the need for continued progress in reducing banks’ high non-performing loan exposures, which “will require deeper measures,” as well as additional reforms to bolster investment, which was stable in 2018, but at a low level of 11.6 percent of GDP.

It also noted that “sales of state-owned assets, which can attract new financing, are progressing more slowly than anticipated.”

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