IMF sees growth of 3.5 percent, urges hard structural reforms

The Greek economy is expected to grow 3.5 percent this year in light of increased uncertainties, the International Monetary Fund (IMF) forecast yesterday, as it urged Greece to step up the pace of structural reforms seen as key to achieving real convergence with other eurozone members. In its country report released by the Greek Finance Ministry yesterday, the Washington-based think tank said it «largely agreed with the [official] growth outlook [of 3.8 percent] but subsequently revised its 2003 GDP growth forecast down to 3.5 percent, in light of more recent indicators.» It cited as an example the tourism sector, a crucial industry which accounted for 8 percent of Greek output last year, as one area which could suffer through any extended fallout from the war in Iraq. A downturn in Greece’s major export markets and further appreciation of the euro could similarly hamper growth, the IMF pointed out. The implementation of structural reforms, on the other hand, could boost growth prospects, it said. It noted the importance the government placed on reforms but pointed out that «in some important areas, however, reforms fell short of initial intentions as compromises were made in the interest of preserving social cohesion.» It said additional reforms were crucial to Greece achieving real convergence. Further reforms of product and labor markets «are essential to contain inflationary pressures and to foster total factor productivity, thereby facilitating real convergence and reducing reliance on foreign savings,» the think tank stressed. The IMF also drew attention to emerging macroeconomic imbalances, namely Greece’s high level of debt, large external current account deficit, rapidly rising private sector indebtedness and structural impediments to growth. Echoing similar calls from the Bank of Greece, the think tank said wage restraint could strengthen Greek competitiveness and productivity, helping in turn to narrow the current account deficit. The government on its part should rein in expenditures, both in public sector wages and military spending, as part of fiscal consolidation efforts, it suggested. The IMF expressed disappointment in two areas: Last year’s pension reforms failed to address spending pressures in the long run and the labor market has yet to focus on facilitating the entry of women and the young into the work force, it said. The IMF also questioned the government’s ability to take action to resolve these issues, noting Greece’s projected strong growth and forthcoming general elections «could weaken the resolve for policy action at this juncture.» However, delaying could bring more distress in the future as «that would ultimately require considerably more difficult steps,» it warned.

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