IMF Urges Greece To Carry Out Fiscal Reform

by Ulrika Lomas, Tax-News.com, Brussels

07 August 2009

On July 24, 2009, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV Consultation with Greece.

After a decade of strong growth led by a domestic demand boom, Greece has started to feel the effects of the global downturn, although with some delay. Despite initial resilience partly explained by high wage growth and accelerated government spending, growth slowed substantially in early-2009. The main driving forces were lower investment and exports, destocking, and a decline in private consumption, as confidence and employment softened. With slower domestic demand and contracting imports, the external current account deficit started to narrow from a deficit of 14.4% in 2008.

The IMF noted that the general government balance remains under pressure with revenue shortfalls and some additional expenditure, which the government is attempting to offset in part with consolidation measures and tax administration efforts. Despite spreads soaring in early 2009, the government quickly completed funding for the year and spreads are now easing again. However, the debt ratio is increasing quickly from already high levels.

In its recommendations, the IMF welcomed the extended period of strong growth through 2008, which had significantly narrowed the gap in real per-capita income with the EU-15. At the same time, the IMF noted that Greece’s large fiscal and external imbalances have made the economy vulnerable during the global downturn.

The IMF underscored that the government needs to address its international competitiveness to avoid extended slow growth if global financial conditions do were to remain weak. The IMF emphasized the need to implement a comprehensive plan for fiscal consolidation and structural reform.

The IMF underscored that fiscal consolidation can no longer be postponed. The deficit-reducing measures of 2009 were in the right direction, the IMF stated, but the organisation called for further durable efforts to place the public debt on a sustainable downward path. The IMF welcomed the measures to protect vulnerable groups, while encouraging the authorities to continue their income policies to help slow public wage and pension costs. The IMF report advocates renewed efforts in social security reform, in light of the very high projected aging costs. In order to reach its goals, the IMF has encouraged the authorities to discuss a clear fiscal strategy with the public and provide monitorable objectives to anchor confidence.

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