IMF recommends more measures to cut deficit

The top priorities for the Greek economy is to reduce fiscal deficits and reform social security, the International Monetary Fund (IMF) suggests in a report that will be published next week. Specifically for the social security issue, the IMF forecasts an explosion in expenditures after 2010 if timely measures are not taken. The IMF also believes that extra measures will be needed to reduce the 2006 budget deficit to a level below 3 percent of Greece’s gross domestic product (GDP). The international organization recognizes the progress that has been achieved in reducing public deficits and reforming the public sector and urges the government to accelerate reform in the public sector, public utilities, as well as in the labor, commodities and services markets. Among other things, the report mentions the following: «The Greek economy has been growing at a fast pace for quite some time, helped, on the demand side, by the drastic reduction in interest rates as a consequence of the adoption of the euro, the deregulation of money markets and the consequent rapid credit growth and, on the supply side, by capital accumulation, immigration and productivity growth. Increase in real GDP terms slowed down somewhat, reflecting a big fall in investment due to the end of spending on the Olympic Games and high oil prices. On the other hand, households’ consumer spending is supported by further credit growth and exports were boosted by the continuing strengthening of the shipping sector and the recovery in the tourism sector. Moreover, reforms were implemented to solve the pension issues of certain banks, improve the business climate, increase labor market flexibility and encourage investment in infrastructure.» Challenges Despite these signs of progress, the government still faces a broad reform agenda, according to the IMF experts. Thus: «Fiscal adaptation must continue for several more years, the need to reform social security becomes increasingly urgent and further structural reform is needed in the labor and goods markets and in the public sector. If these challenges are met, Greece will be in a better position to converge with Western European productivity and income levels and take advantage of its neighbors’ economic growth.» The IMF points out that the main priority for the government’s economic policy is to reduce the budget deficit, remarking that «despite strong economic growth and low interest rates, the general government deficit rose over the past four years and significantly exceeded 6 percent (of GDP) in 2004.» The report describes the government’s goal to reduce the deficit to below 3 percent in 2006 as «laudable» but adds that «significant further measures» will be required to achieve that goal. «We must see fiscal adaptation within a medium-term framework that will distribute limited state resources according to specifically spelled out policy priorities and we recommend to authorities that they develop and adopt a multi-year strategy in their budgets. The strategy must aim at balanced budgets by 2010, in order to prepare for the rising cost of population aging in the next decade. From 2010 onward, budget surpluses must be sufficient in order to allow for a faster repayment of the public debt and free more resources for higher pension payments,» the report says. The IMF recommends the reform of tax authorities and the assessment of programs in order to find out whether public money is being wasted. Banks The IMF report points out that Greek banks «have a good capital structure and profitability, with adequate liquidity. Their strong position reflects the fast credit growth to new customers, especially households and small and medium-sized enterprises, as well as their expansion into Southeastern European regions with low bank development thus far.» The report points out that banks must pay attention to loans whose repayment has fallen behind schedule. It also claims that legal obstacles remain that hinder their competitiveness. Also, banks face higher financing costs since deposit growth has fallen behind credit growth. The report also hails efforts to deregulate energy markets and boost investment, as well as reform public utilities by effectively abolishing lifetime employment. It points out, though, that labor market reform is still far too slow.

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