We thank staff for the excellent report and for providing valuable technical assistance, which is crucial for the implementation and the success of the program.
Albeit with some delays, Greece continues to advance the fiscal and structural reforms necessary to deliver the program’s medium-term objectives. All end-December 2010 quantitative performance criteria have been met. Prior actions for the current review have also been completed. Although arrears have been significantly reduced, the indicative target on arrears accumulation was missed. Reducing the arrears accumulated before 2010 remains a challenge, however in January 2011 almost euro 3.5 billion of arrears were settled.
Taking into account new revised data, the 2010 deficit declined to 9.5 percent of GDP from 15.4 percent a year earlier, on account of revenue increases accompanied by significant under-execution of the expenditure budget. Crucial fiscal structural reforms aimed at broadening the tax base and rationalizing spending have moved forward.
Although the financial system remains under stress, private banks were able to raise capital levels. At the same time, a state bank (ATE) has recently started its restructuring process. In this context, exceptional ECB liquidity support has helped fund the banking system.
Landmark reforms, including bills on restructuring public transportation and on opening up closed-shop professions, were ratified by the Greek Parliament in February 2011.
Going forward, the Greek authorities are committed to keeping the program on track, while recognizing that more emphasis on structural reforms implementation will be crucial to fully gain the pay off of all the efforts put in place so far. To this end, they aim to implement a far-reaching set of measures, including: the revision of the personnel framework for the public sector, the completion of the tax administration reform plan, the enhancement of expenditure and arrears monitoring, the improvement of the asset and liability management, and the implementation of an expanded privatization plan. Actions to sustain an investment and export-driven growth strategy will also be put in place. 2
GDP declined by 4.5 percent in 2010, slightly more than expected by the authorities, and it is estimated to further contract by 3 percent in 2011. Against this background, leading indicators marked some improvement. In particular, according to the Bank of Greece (BoG) figures, industrial turnover and industrial new orders rose y-o-y by 5.6 percent and 3.9 percent respectively in 2010. When limited to the foreign market, such leading indicators rose impressively in December 2010. In particular, industrial turnover and new orders increased y-o-y by 28.7 percent and 12.8 percent respectively.
HIPC inflation in 2010 has been somewhat higher than projected, reflecting increases in indirect taxation and higher-than-expected oil prices. However, it has started easing in recent months. Going forward, HIPC dynamics is expected to further slow down to 2.4 percent during the course of 2011 as a result of both domestic demand retrenchment and positive effects of supply-side reforms.
The current account deficit narrowed to 10.5 percent of GDP in 2010 on the heels of an improved non-oil trade balance and increased shipping activities that outpaced weaknesses in tourism receipts. A further reduction is envisaged for 2011 as a consequence of continued weak internal demand and improvement in competitiveness, which already started in the second half of 2010, as testified by the 2.6 percent reduction on economy-wide unit labor costs in 2010.
As expected, unemployment increased in 2010, reaching an average rate of almost 12.5 percent. Against this background, key labor market reforms in the areas of employment protection and arbitration and collective bargaining have been approved, and are expected to pay off in the medium term and reverse the current trend in unemployment rates.
The authorities’ strategy aims to reduce the fiscal deficit to below 3 percent of GDP by 2014, putting the current fiscal adjustment on a sounder footing. To this end, the parliament approved last December a tight central government budget that targets a deficit-to-GDP ratio of 7.5 percent for 2011. Data available for January 2011 show a central government surplus of euro 165 million.
To further reinforce such a strategy, the Greek authorities will present this month a medium-term public sector adjustment plan. It is expected that this will be approved by the Parliament in May, after consultations with political parties and social partners. The plan will contain measures amounting to 8 percent of GDP. In addition, the authorities are also ready to define additional contingency actions, should the targets be missed.
The measures included aim to curb inefficient public spending, limit their impact on growth, and at the same time protect the most vulnerable. The plan will cover several sectors and 3 areas of government spending by setting both annual spending ceilings for line ministries and fiscal balance targets for the 2012-14 period.
In particular, the plan envisages an increase of state enterprise tariffs; a reduction of operating costs, including the wage bill; and a prioritization of investment. In parallel, a public wage bill will simplify the wage grid, including allowances, and reducing excess employment in the public sector. Measures on the revenue side will enhance efforts to facilitate more effective tax administration, simplify the tax system, and raise revenues. Social spending reform will identify ways to streamline social programs, to eliminate duplications, and to better target social spending. Finally, on public investment, the authorities will prioritize projects and estimate savings to the budget. In addition, the authorities are implementing far-reaching anti-evasion measures, while legislative steps are in the process of removing existing barriers to tax collection and streamlining the judicial appeals process. In parallel, public financial management is being improved.
The key reforms of the pension and health systems have entered into their second phases. The July 2010 pension reform has gone a long way toward stabilizing spending of the main pension funds at the 2009 level (in percent of GDP). The completion of an assessment of the main supplementary pension funds is expected by end-March 2011 and the authorities are ready to adjust further the parameters of the main pension funds, if needed. The health plan is broadly on track (e.g. cost-reducing reforms in hospitals, co-payments, and extended negative lists for non-reimbursable pharmaceutical products). Going forward, the government is faced with the complex issue of strengthening spending controls and reducing pharmaceutical expenditures. To cope with such issues, an independent task force to map out an overall reform of the health system has been established and will deliver its final report by the end of May. A time-bound action plan built on the outcomes of this final report is due by the end of June.
Concerning public real estate, the authorities will establish a comprehensive inventory of the government’s assets by the end of the year. Taking such inventories into account, the government aims to implement an enhanced privatization program through 2013, which aims to raise euro 15 billion in the years 2011-13. The program is scheduled to be adopted by the Council of Ministers by the end of July. In addition, by the end of March, the Greek parliament is expected to approve a new law creating a single public procurement authority.
Financial Sector Policies
The banking sector remains under pressure. As expected, credit and liquidity conditions remain tight, while asset quality and profitability are decreasing. However, the banking system as a whole remains resilient, and private banks have had some success in raising capital in the markets. Additionally, during the second half of the year, there was a substantial slowdown in the decline of total deposits, while the Tier 1 ratio remains above 10 percent with a total Capital Adequacy Ratio (CAR) of 11.4 percent.
Greek banks have been requested by the BoG to prepare medium-term plans to adjust their funding. In this respect, the authorities are committed to activating, in cooperation with the ECB, a supplementary tranche of euro 30 billion to guarantee bank bonds. At the same time, the BoG will continue monitoring the liquidity situation of the banking system, allowing banks to gradually move toward a sustainable medium-term funding system. To this end, the authorities will provide all banks with the flexibility needed for unavoidable reductions in their cost base.
The Financial Stability Fund (FSF) will soon be boosted by an additional euro 1 billion. A further 1 billion deposit on a dedicated account for the FSF will be made in the second quarter of 2011. Further amounts of up to euro 6.5 billion will be released consistently with the need for bank capital, according to the program reviews.
Structural Policies and Competitiveness
The authorities have made substantial progress in advancing their far-reaching structural reform agenda. While the pace of reform is uneven among different areas, overall it is progressing expeditiously. In recent months, the reform efforts focused mainly on the labor market; the liberalization of closed professions; licensing; services directives; the liberalization of the energy market; competition; and market entry. While the study of public pay and employment has been delayed, new statistical regulations have been specified and will be approved shortly by the National Statistical Agency (ELSTA).
The authorities remain committed to advancing the structural reform agenda in order to guarantee an investment- and export-led recovery. In particular, the government is moving ahead with the liberalization of closed professions, with a report evaluating the recently approved reform expected to be issued by the Ministry of Finance by end-September. To enhance competition, a new law for the competition authority, which increases its competencies and strengthens its independence, is expected to be passed by the Parliament by the end of this month. In addition, a recently approved one-stop-shop law will be made fully operational by April 1st, while decrees implementing the framework for large investment projects will be issued by the end of June.