The Executive Board of the International Monetary Fund (IMF) on Wednesday unveiled details of its Article IV consultation with Greece, concluded last month.
In their conclusion, the Executive Directors welcomed the extended period of strong performance of the Greek economy, which has significantly narrowed the gap in real per capita income between Greece and the EU-15.
Directors considered that, while economic prospects still appear relatively strong in the near term, risks to the outlook are tilted to the downside, given the weaker external environment and the deterioration of global financial conditions.
Additionally, Directors underscored that a persistent loss of cost competitiveness risks constraining Greece's growth in the medium term. Against this background, they encouraged the authorities to build the social consensus needed to undertake more ambitious medium-term reforms.
Furthermore, Directors observed that the banking system appears sound, and has remained unaffected by the recent financial market turbulence to date.
Nevertheless, financial sector vulnerabilities, including those arising from continued rapid credit growth, rising exposures in southeastern Europe, the still-high level of nonperforming loans, and the possible need to rely on wholesale funding will require close monitoring.
In this context, Directors welcomed the Bank of Greece's efforts to strengthen provisioning requirements and lending standards, and called for upgrading the stress-testing framework. Directors particularly welcomed steps to strengthen cross-border banking supervision in cooperation with other supervisors in southeastern Europe.
They also commended the authorities for the adoption of a risk-based approach to supervision by the new insurance supervisor.
Directors then welcomed the authorities' intention to achieve a balanced budget by 2010, and considered that further improvements in tax administration and a tighter control over spending will be necessary to attain this target.
Sustained fiscal consolidation thereafter to a surplus position will be helpful for safeguarding debt sustainability and addressing the prospective large aging costs, the IMF board suggested.
Directors called for the development of a medium-term budget framework to help guide fiscal strategy and prioritize policy objectives.
Improved revenue collection will be a centerpiece of fiscal consolidation in 2008 and beyond. Directors saw scope for broadening tax reform.
Improving tax compliance by simplifying tax laws and procedures and further intensifying risk-based auditing should be a priority, they argued.
Directors also encouraged the authorities to consider phasing out distortionary tax exemptions, with a view to broadening the tax base and simplifying the rate structure.
Moreover, Directors emphasized the need for further reforms to expenditure management.
They welcomed the steps already taken to increase the transparency and accountability of public entities, and to improve efficiency in the health care system.
Additional budget reforms should include extension of the coverage of the budget, full integration of program-based budgeting into budget preparation and execution, and the introduction of appropriate financial management information systems.
The Directors also agreed that comprehensive reform of the social security system will be required to preserve the long-term sustainability of the public finances, taking into account the costs of population aging.
They considered that the authorities' pension reform agenda will need to be broadened, with policy proposals based on a full assessment of financing needs and cost savings. Directors encouraged the authorities to complete and publish detailed projections of the cost of population aging in accordance with the EU methodologies, and to prepare an adequately ambitious reform program on this basis.
Looking to the future, Directors saw further reforms to product and labor markets as key to sustaining medium-term growth and strengthening international competitiveness.
They welcomed the progress already made in product market reform, and encouraged the authorities to press ahead with further measures.
Areas for action include further extension of simplified business licensing procedures, privatization of infrastructure facilities, and strengthened competition in the network industries and the transport sector.
Further initiatives in the labor market should include reducing the restrictiveness of the employment protection legislation and increasing the flexibility of the wage setting system.
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