Abstract
The staff report for the 2004 Article IV Consultation on Greece focuses on economic developments and policies. Rising incomes and a falling, though still high, unemployment rate underpinned strong household consumption, while increased profitability spurred investment spending, especially construction. Inflation has been above the euro area average, eroding international competitiveness and export market shares. Regarding structural policy, the authorities recognized that Greece still lags significantly behind the European Union in real per capita income despite the economic boom.
Staff Report for the 2004 Article IV Consultation Supplementary Information
Prepared by the European and Policy Development and Review Departments
Approved by Alessandro Leipold and Liam Ebrill
January 28, 2005
1. This supplement to the staff report for the 2004 Article IV consultation with Greece provides an update on recent developments. The new information does not change the thrust of the staff appraisal. However, the authorities’ medium-term fiscal path, as laid out in its Stability and Growth Program (SGP) update, falls well short of the adjustment path advocated by staff.
2. Macroeconomic indicators are broadly in line with expectations. Third-quarter growth remained robust at 3.8 percent (year-on-year). Looking forward, growth prospects have improved with the reduction in world oil prices (although these remain volatile), but have also been undermined by the more subdued recovery now expected in the euro area. The January Consensus Forecast for 2005 real GDP growth remained at 2.7 percent. Inflation has been somewhat lower than expected due to the stronger euro, weaker oil prices, and a moderation in food prices due to favorable weather conditions. Estimates of the 2004 general government budget deficit are not yet available. However, the cash deficit of the central government rose to 6½percent of GDP by end-November, and preliminary reports indicate that large revenue shortfalls have continued in December. In a press interview on January 16 the central bank governor said the central government cash deficit for 2004 as a whole was 9.4 percent of GDP. As a result, the risks for a general government deficit higher than the 5½ percent of GDP estimated in the staff report may have materialized. Having been placed on a negative rating watch, Greece was downgraded by Fitch on December 16, 2004.
3. In its report to ECOFIN, the European Commission concluded that the Greek authorities have not taken effective action to correct the excessive budget deficit. The Commission judged that the measures put in place last year and in the 2005 budget would not reduce the deficit below 3 percent of GDP, and estimated that the 2004 budget deficit will be 5½ percent of GDP. Both of these conclusions are in line with the projections in the staff report, although the Commission projects a more or less unchanged debt-GDP ratio in 2005, whereas the staff foresees a modest decline. In its meeting on January 18, ECOFIN, while acknowledging measures put in place by the Greek government for 2004 and 2005, decided that Greece is not in compliance with the Council recommendations issued on July 5, 2004 and considered that the excessive deficit may persist in 2005.
4. The authorities have submitted an updated Stability and Growth Program for 2004-07 to the Commission (Table 1). The macroeconomic framework assumes that output growth will exceed 4 percent by 2007, due to strong private consumption demand, underpinned by rapid real wage growth, and continued investment activity. The contribution of the external sector is expected to rise due to the global recovery and improved competitiveness.
Greece: Authorities’ Medium-Term Program (In percent, unless otherwise indicated)
Greece: Authorities’ Medium-Term Program (In percent, unless otherwise indicated)
| 2003 | 2004 | 2005 | 2006 | 2007 | ||
| Real GDP growth | SGP 2003 | 4.0 | 4.2 | 4.0 | 3.8 | … |
| SGP 2004 | 4.5 | 3.7 | 3.9 | 4.0 | 4.2 | |
| GDP deflator growth | SGP 2003 | 3.5 | 3.4 | 3.2 | 3.0 | … |
| SGP 2004 | 3.5 | 3.6 | 3.3 | 3.2 | 3.0 | |
| Employment growth | SGP 2003 | 1.5 | 1.7 | 1.3 | 1.1 | … |
| SGP 2004 | 1.3 | 2.0 | 1.5 | 1.5 | 1.6 | |
| General government overall balance | SGP 2003 | -1.4 | -1.2 | -0.5 | 0.0 | … |
| (In percent of GDP) | SGP 2004 | -4.6 | -5.3 | -2.8 | -2.6 | -2.5 |
| Public debt | SGP 2003 | 102 | 99 | 95 | 91 | … |
| (In percent of GDP) | SGP 2004 | 110 | 112 | 110 | 106 | 103 |
Greece: Authorities’ Medium-Term Program (In percent, unless otherwise indicated)
| 2003 | 2004 | 2005 | 2006 | 2007 | ||
| Real GDP growth | SGP 2003 | 4.0 | 4.2 | 4.0 | 3.8 | … |
| SGP 2004 | 4.5 | 3.7 | 3.9 | 4.0 | 4.2 | |
| GDP deflator growth | SGP 2003 | 3.5 | 3.4 | 3.2 | 3.0 | … |
| SGP 2004 | 3.5 | 3.6 | 3.3 | 3.2 | 3.0 | |
| Employment growth | SGP 2003 | 1.5 | 1.7 | 1.3 | 1.1 | … |
| SGP 2004 | 1.3 | 2.0 | 1.5 | 1.5 | 1.6 | |
| General government overall balance | SGP 2003 | -1.4 | -1.2 | -0.5 | 0.0 | … |
| (In percent of GDP) | SGP 2004 | -4.6 | -5.3 | -2.8 | -2.6 | -2.5 |
| Public debt | SGP 2003 | 102 | 99 | 95 | 91 | … |
| (In percent of GDP) | SGP 2004 | 110 | 112 | 110 | 106 | 103 |
5. The SGP envisages only a modest decline in the overall general government deficit to 2½ percent of GDP in 2007. Revenue collection is expected to remain strong due to robust growth, improved tax collection, and a broader tax base. These factors are expected to offset losses from a continued decline in the tax burden of enterprises and households after 2005. Despite the government’s plans to restrict hiring, allow only modest wage increases, and reduce current operating expenditure, primary spending is projected to accelerate after 2005.
6. The new SGP’s medium-term fiscal path is not very ambitious and is subject to significant risks should growth falter (Table 2). Given the authorities’ growth and inflation assumptions, but using staff’s estimate of potential output growth (3¼ percent a year), the cyclically adjusted deficit, after falling significantly in 2005, remains unchanged in 2006 and rises slightly in 2007, in contrast to staff’s recommendation of continued reductions in the structural deficit of some ¾ percent a year. Were the staff’s medium-term output and inflation projection to materialize, actual deficits would increase substantially in 2006-07.
Greece: Staff Analysis of Stability and Growth Program (2004-07) (In percent of GDP)
Revenue, expenditure and nominal GDP as reported in the Stability and Growth Program (SGP), 2004-07.
Calculations are based on IMF staff estimates of potential output.
The SGP fiscal outcome in the event nominal GDP were as estimated in SM/04/423.
Revenue, expenditure and nominal GDP as estimated in Tables 4–5 in SM/04/423.
Greece: Staff Analysis of Stability and Growth Program (2004-07) (In percent of GDP)
| 2003 | 2004 | 2005 | 2006 | 2007 | |
| Stability and Growth Program 1/ | |||||
| Overall balance | -4.6 | -5.3 | -2.8 | -2.6 | -2.5 |
| Primary balance | 1.2 | 0.0 | 2.2 | 2.5 | 2.6 |
| Cyclically adjusted overall balance 2/ | -5.2 | -6.1 | -4.0 | -4.0 | -4.2 |
| Cyclically adjusted primary balance 2/ | 0.6 | -0.8 | 1.1 | 1.1 | 0.8 |
| Public debt | 110 | 112 | 109 | 106 | 103 |
| Low Growth Scenario 3/ | |||||
| Overall balance | -4.6 | -5.4 | -3.4 | -3.7 | -4.3 |
| Primary balance | 1.2 | -0.1 | 1.7 | 1.5 | 1.0 |
| Public debt | 110 | 112 | 109 | 108 | 107 |
| IMF Estimates (Staff Report) 4/ | |||||
| Overall balance | -4.6 | -5.5 | -3.5 | -3.5 | -2.9 |
| Primary balance | 1.2 | -0.2 | 1.6 | 1.6 | 2.1 |
| Cyclically adjusted overall balance | -5.2 | -6.4 | -4.3 | -4.1 | -3.3 |
| Cyclically adjusted primary balance | 0.6 | -1.1 | 0.8 | 1.0 | 1.6 |
| Public debt | 110 | 112 | 109 | 106 | 103 |
Revenue, expenditure and nominal GDP as reported in the Stability and Growth Program (SGP), 2004-07.
Calculations are based on IMF staff estimates of potential output.
The SGP fiscal outcome in the event nominal GDP were as estimated in SM/04/423.
Revenue, expenditure and nominal GDP as estimated in Tables 4–5 in SM/04/423.
Greece: Staff Analysis of Stability and Growth Program (2004-07) (In percent of GDP)
| 2003 | 2004 | 2005 | 2006 | 2007 | |
| Stability and Growth Program 1/ | |||||
| Overall balance | -4.6 | -5.3 | -2.8 | -2.6 | -2.5 |
| Primary balance | 1.2 | 0.0 | 2.2 | 2.5 | 2.6 |
| Cyclically adjusted overall balance 2/ | -5.2 | -6.1 | -4.0 | -4.0 | -4.2 |
| Cyclically adjusted primary balance 2/ | 0.6 | -0.8 | 1.1 | 1.1 | 0.8 |
| Public debt | 110 | 112 | 109 | 106 | 103 |
| Low Growth Scenario 3/ | |||||
| Overall balance | -4.6 | -5.4 | -3.4 | -3.7 | -4.3 |
| Primary balance | 1.2 | -0.1 | 1.7 | 1.5 | 1.0 |
| Public debt | 110 | 112 | 109 | 108 | 107 |
| IMF Estimates (Staff Report) 4/ | |||||
| Overall balance | -4.6 | -5.5 | -3.5 | -3.5 | -2.9 |
| Primary balance | 1.2 | -0.2 | 1.6 | 1.6 | 2.1 |
| Cyclically adjusted overall balance | -5.2 | -6.4 | -4.3 | -4.1 | -3.3 |
| Cyclically adjusted primary balance | 0.6 | -1.1 | 0.8 | 1.0 | 1.6 |
| Public debt | 110 | 112 | 109 | 106 | 103 |
Revenue, expenditure and nominal GDP as reported in the Stability and Growth Program (SGP), 2004-07.
Calculations are based on IMF staff estimates of potential output.
The SGP fiscal outcome in the event nominal GDP were as estimated in SM/04/423.
Revenue, expenditure and nominal GDP as estimated in Tables 4–5 in SM/04/423.
7. While details remain sketchy in many areas, the structural reform priorities laid out in the SGP are a step in the right direction. These include: improving tax administration and expenditure management; establishing an Independent Body of Fiscal Inspectors to improve the effectiveness of the fiscal auditing system; implementing a new framework to improve the financial operation of public enterprises; and, health care reform to improve financial viability in the short run and long-run sustainability. The government intends to continue improving product market competition by putting in place the pending secondary legislation to open up the electricity market, and speeding up the opening of the natural gas market. The government also hopes to attract investors by simplifying, updating, and codifying legislation, rationalizing the tax system, reducing red tape, and providing incentives to investors. No new initiatives have been announced in the areas of labor-market or long-term pension reform (although tripartite discussions are taking place to settle details on the transfer of pension obligations from the formerly state-owned banks to the public sector).