This study is carried out against a backdrop of deep divisions in Greece and in Europe over how to handle the challenges now confronting Greece. Greece’s deeper medium-term policy needs and identifying ways to replace the expected market financing are discussed. Structural reforms tackled to strengthen the competitiveness and help the country integrate into the euro area. Finally, Greece has specified the policies necessary to overcome recent inertia and deliver program objectives, and a memorandum of financial and economic policies is discussed.
The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Greece’s economic performance under a program supported by a three-year Stand-By Arrangement (SBA) for Greece. The completion of the review enables the immediate disbursement of an amount equivalent to SDR 2.9 billion (about €3.2 billion), bringing total Fund disbursements under the SBA to an amount equivalent to SDR 15.6 billion (about €17.4 billion).
The SBA, which was approved on May 9, 2010 (see Press Release No. 10/187), is part of a joint package of financing with Euro area member states amounting to €110 billion over three years. It entails exceptional access to IMF resources, amounting to about 2,400 percent of Greece’s new quota as a result of the 2008 quota reform.
Greece’s economic adjustment program has continued to make some progress toward its objectives. The economy is rebalancing and competitiveness is gradually improving, and a return to positive economic growth is projected for the first half of 2012. Greece has specified the policies necessary to overcome recent fiscal adjustment and structural reform implementation problems, which should allow the country to make further progress toward program objectives in the period ahead.
Following the Executive Board’s discussion, Ms. Christine Lagarde, IMF Managing Director and Executive Board Chair, said:
“The program is delivering important results: the fiscal deficit is being reduced, the economy is rebalancing, and competitiveness is gradually improving. However, with many important structural reforms still to be implemented, significant policy challenges remain. A durable fiscal adjustment is needed, lest the deficit get entrenched at an unsustainably high level, and productivity-enhancing reforms should be accelerated, lest growth fail to recover.
“The authorities have made progress in the fiscal area. A new medium-term strategy was approved, defining the measures required to reduce the general government deficit below 3 percent of GDP by 2014. The strategy confronts difficult issues, including the generous terms of public sector employment, the possibility to close inefficient public entities, and tax evasion. Steadfast and timely implementation will be crucial, together with complementary institutional reforms improving revenue administration and public financial management.
“The government’s privatization strategy is a critical step toward boosting investment and growth and reducing Greece’s high debt burden. While the target of selling €50 billion of state assets by 2015 is very ambitious, the establishment of an independent privatization agency should help realize transparent and timely implementation.
“To strengthen Greece’s competitiveness, structural reform implementation needs to be accelerated. This will help achieve synergies, such as between privatization and reducing administrative barriers to investment. The reform agenda should be expanded to address Greece’s high labor tax wedge and inefficient judicial system.
“To preserve financial sector stability, banks’ capital buffers need to be raised, and an adequate support and resolution framework should be put in place. Continued liquidity support from the ECB remains critical to manage liquidity needs.
“Greece’s debt sustainability hinges critically on timely and vigorous implementation of the adjustment program, with no margin for slippage, and continued support from European partners and private sector involvement,” Ms. Lagarde said.