How a rising BoP deficit will not affect currency reserves

The picture given by the recently announced figures of the country’s balance of payments in the first four months of the year may be somewhat misleading. According to data released by the Bank of Greece, the deficit was up 16 percent year-on-year but the increase was not, as we have been used to, due to a rise in the trade deficit. This remained almost stable, as export receipts (excluding fuels) were slightly up while imports declined 3.9 percent – the lower volume of imports was the surest indication that the market was in recession. Also down were receipts from tourism – largely the result of the upheaval brought about by the Iraq war. Overall, the country’s surplus from the services balance was larger than in the same period last year. This is not a particularly positive development; it simply reflects the fact that Greeks traveled abroad less. The deficit in the incomes balance was higher as inflows of salaries, interest and dividends were lower than respective outflows. The biggest loss by far this year came from a 26.7 percent decline in receipts of European Union funds; obviously, delays in the processing of EU-funded programs, particularly investment projects subsidized under the Third Community Support Framework, are the the most important single factor accounting for this large drop. Government officials claim that EU inflows will accelerate in coming months and that the shortfall will disappear by the end of the year. Whatever the case, the fall in EU receipts in the January-April period was larger than the total value of Greek exported goods – the largest source of concern regarding the country’s balance of payments. Investment, both by foreigners in Greece and by Greeks abroad was also lower, leaving the investment balance virtually unchanged. Despite the rise in the overall deficit, Greece’s currency reserves remain at high levels. How a country with lower receipts from tourism, trade and capital movements stays prosperous and maintains high reserves is a mystery to all. The answer comes as an even greater surprise: The Greek economy attracts foreign investment. But this is not of the direct type that would boost the country’s productive base; foreign institutionals are flocking to Greek State bonds. It appears Greeks have developed an unenviable record when selling goods and services but excel in selling paper. The overall picture is certainly not one of disaster; it should, nevertheless, be a serious cause of concern as regards future prospects and point to an urgent need for measures to boost production, employment and incomes. In the present political conditions, such a development seems unlikely. At the beginning of their term, governments usually put off the adoption of unpalatable measures until midterm. When the time comes, they postpone them again until after the next election. Even if avoiding unpopular measures do not save the incumbents from defeat, there is the certainty that the successors will follow much the same policy; which, again, will benefit the predecessors.