IMF calls for reforms

The team of experts from the International Monetary Fund (IMF) that was visiting Greece over the past couple of weeks yesterday submitted its annual report on the state of the economy to Economy and Finance Minister Giorgos Alogoskoufis. The report, predictably, calls for an acceleration of structural reforms in the goods, labor and services markets and for greater fiscal tightening. The report counsels the government to consider an immediate overhaul of the social security system and forecasts that the aging population, which upsets the balance between the employed and pensioners, will create financing problems from 2010 and not from 2025 as the General Confederation of Greek Labor (GSEE) claims. More reforms The IMF team considers that, this year, the government is making efforts to reform the economy and put public finances in order. However, progress, especially in fiscal policy, is inadequate. The report also criticizes the securitization of overdue debt to the state as a one-off measure that artificially reduces the budget deficit while highlighting the government’s inability either to glean adequate revenues or cut spending sufficiently. The IMF recommends more flexibility in the labor market, that is, greater leeway to businesses to hire and fire people, more flexible work hours and greater use of part-time employment. It also calls for pay rises not to exceed the sum of the rise in productivity and average eurozone inflation. The state is called upon to privatize all public utilities. Commenting on these recommendations, Alogoskoufis said that the government will consider them, but not necessarily adopt them. On public utilities, the government will follow the model already adopted for former telecommunications monopoly OTE: gradual divestment, retention of a sizable minority stake, reduction of the workforce mainly through voluntary redundancy schemes and an end to permanent employment for new hirings. Alogoskoufis added that collective agreements between employers and unions will be maintained. «We have chosen a strategy of mild fiscal adjustment because we consider it the most appropriate means of ensuring growth,» Alogoskoufis said. Credit growth The IMF report also warns banks about the dangers of a possible steep rise in interest rates or a slowdown in growth. It calls on the Bank of Greece to continue to monitor credit expansion and, especially, the increasing number of loans in arrears. According to the report, banks face the following challenges: legal obstacles that inhibit their competitiveness; the increased cost of financing, since the deposit growth rate lags well behind credit growth; the need to boost their risk management capabilities; and the introduction of international accounting standards (IAS) that improve transparency but may lead to a one-off effect on capital. Alogoskoufis said that the Greek economy has performed admirably this year, despite economic stagnation in the eurozone. He forecast that the 2005 deficit will match the target in the updated Stability Pact report, that is, will be about 3.6 percent of the country’s GDP. Asked about a possible privatization of EYDAP, the Athens water and sewage company, Alogoskoufis said that it will not happen soon but did not preclude an eventual selloff. Tax cuts Alogoskoufis also reiterated the government’s decision to gradually cut income tax rates, with the long-term goal bearing a single rate of 25 percent. The first phase will include changes in the level of tax-exempt income. In 2007, for example, it will increase to 12,000 euros, from 11,000 currently, while some tax rates will be cut. The IMF report says that the above measures must be combined with deep reforms in managing expenditures and tax collection. Alogoskoufis said the tax authorities will be mobilized to collect overdue tax payments, especially in view of the upcoming securitization. This is because the state will be paying the bearers of securities every quarter and must find the necessary funds. Total overdue payments to the state are estimated at 17-18 billion euros.