BoG urges speed in state reforms

The Bank of Greece (BoG) yesterday called for greater speed from the government in bringing about structural reforms, vital in helping to lift productivity and, in turn, wages, while social partners were urged to exercise restraint in ongoing wage negotiations because of the inflationary impact. The central bank in its semi-annual monetary policy report released yesterday said «the right combination of fiscal and structural reforms and social partners’ conduct» could in the medium term expedite real convergence. BoG urged the government to continue its fiscal restructuring in line with its debt reduction goals set out in the stability and growth pact. Crucial to this is the adoption of binding spending goals implemented via a curb on state subsidies and upgrading the monitoring and evaluation systems. It also called for urgency in carrying out reforms regarding the tax structure, the social security system and the privatization program. The government has promised to unveil changes to the tax system next month, with the modifications taking effect in 2003. Ongoing discussions on upgrading the social security system, in the meantime, have resulted in piecemeal solutions, while the state sell-off program has seen more failures than successes. Notwithstanding these problems, BoG said privatizations would boost the state coffers and simultaneously strengthen the effectiveness of state-controlled companies. The central bank said a raft of changes, such as opening up the energy and labor markets, improving the investment climate and enhancing public services would promote medium-term growth prospects and, over the long term, would lead to real convergence. It said social partners play an equally important role in achieving this goal, especially regarding wage increases and pricing policy. It said current wage negotiations should take into account the transient nature of inflation in the first two months of the year and the benefits from recent tax breaks. The central bank sought to allay fears over the lag on wage convergence, noting that this would come about eventually due to Greece’s eurozone membership and the single market. It nevertheless suggested a greater focus on productivity, more important for boosting real incomes and without any inflationary repercussions. Restraint should also be exercised by companies to adopt a prudent pricing policy, while also upgrading their organizational and technological structures to reinforce their competitiveness, BoG said. The central bank noted that Greece is expected to weather the current global economic downturn relatively better than other countries, with the projected gross domestic product growth significantly higher than the average eurozone estimate, despite inflation overshooting the European Central Bank’s price stability ceiling. It said that recent upbeat economic indicators point to a GDP growth rate of 3.5 percent this year against the official forecast of 3.8 percent and a range of 3 to 4 percent predicted by global organizations. Average annual inflation this year is projected to drop to 3 percent from 3.4 percent in 2001, which is still higher than the 2.5 percent forecast in the bank’s interim report last November. The figure, however, is substantially higher than the 2 percent defined by the European Central Bank as essential for price stability. BoG said declining inflation in the eurozone will impact favorably on Greece, while the continued deregulation of the telecommunications market and the return of fruit and vegetable prices to more normal levels are expected to keep inflation down. It said profiteering and a jump in unit labor costs could possibly derail efforts to hold down inflationary pressures.

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