IIF: Relax fiscal policy in favor of faster growth

The Institute of International Finance (IIF) forecasts a Greek deficit of 8.5 percent for this year, while recommending to both the government and the troika that the country?s gross domestic product is bolstered in order to stop the recession as early as possible.

In a report on the subject of whether there is a better way for fiscal streamlining than the current program, the IIF says that the government will miss its target of a budget deficit of 7.6 percent of GDP for this year, even with the new measures it has taken over the last few days, stressing that the best way out of the crisis is through funding growth and not taxation.

The IIF goes on to propose that the eurozone and the International Monetary Fund speed up the distribution of their loans to Greece to channel more funds to the country?s economy as quickly as possible.

The report notes the difference between planned and actual revenues and expenditures, estimating the primary deficit will overshoot the figure forecast by over 2 billion euros. This, combined with the dramatic worsening of the GDP contraction (to 5 instead of 2.6 percent), is seen leading the fiscal deficit to an increase amounting to 1 percent of GDP.

Greece has registered some significant progress in terms of reducing its deficit, the IIF acknowledges, but there are still some serious problems regarding growth. The institute, which played a key role in the July 21 eurozone agreement for Greece?s second bailout package, expects the country?s GDP to drop to 221.8 billion euros this year from 230.2 billion in 2010 and 235.1 billion in 2009. It expects the recession to continue into next year (by about 1 to 2 percent), taking GDP down to 219.3 billion euros before it starts rebounding.

To speed up an economic recovery, the IIF suggests that the troika and the government need to put aside their tight fiscal policy and start to increase the funds going to public investment from next year. It estimates that if investment grows by 2 billion euros in 2012 and capital transfer from the European Union increases by 1 billion euros, then the drop in the GDP will be contained, taking the country?s gross domestic product to 221.1 billion euros from a forecast of 219.3 billion. The results will be more evident later, as GDP will come to 230 billion euros in 2013 and 239 billion in 2014, according to the IIF.

The institute further stresses the need for the privatization of Hellenic Postbank, ATEbank, the Public Gas Corporation, the Piraeus and Thessaloniki port authorities, the Thessaloniki Water Company and railway operator TRAINOSE.