Tuesday, June 10, 2014
Greece: Fifth Review Under the Extended Arrangement Under the Extended Fund Facility, and Request for Waiver of Nonobservance of Performance Criterion and Rephasing of Access
Country Report No. 14/151
June 10, 2014
Extended Arrangement. On March 15, 2012, the Executive Board approved a four-year arrangement in the amount of SDR 23.79 billion (2,159 percent of quota; €28 billion). Purchases totaling SDR 7.2 billion (€8.1 billion) have been made so far, and a purchase in the equivalent of SDR 3 billion (€3.5 billion) is proposed to be released on the completion of the review. Euro area countries have so far disbursed €139.9 billion since this program’s approval (of €144.6 billion committed), of which €48.2 billion was for bank recapitalization. Developments. Significant progress has been made toward rebalancing the economy. The fiscal primary and external current account balances are in surplus. Investor sentiment has improved, and the government successfully placed a medium-term bond. The economy is poised to grow in 2014, after six years of deep recession. All this bodes well for a potentially virtuous cycle of recovery to take hold. But a number of challenges remain to be overcome before stabilization is deemed complete and Greece is on a sustained and balanced growth path. The real exchange rate remains overvalued, and non-tourism exports are relatively weak. Banks face a mountain of bad loans that will require adequate capital and oversight to clean up, absent which the prospects are of a prolonged deleveraging antithetical to the assumed recovery. Fiscal gaps are projected for 2015–16, and public debt remains very high. Policies. The authorities over-performed significantly on their 2013 fiscal primary balance target, achieving a surplus of 0.8 percent of GDP. Although the carryover of the over- performance to 2014 is small, the authorities are on track to achieve this year’s target. They are implementing a number of structural reform commitments, with a notable acceleration of product and service market liberalization, where progress has lagged. However, in the area of labor market reforms, where Greece has made important progress in the past, the program is now falling short of targets. Following the Bank of Greece’s stress tests, the HFSF buffer has been set aside to safeguard financial stability, and ambitious steps are planned to strengthen the private debt resolution framework. Reforms to tax codes have been legislated, aimed at simplifying the system and making tax administration easier and, thus, addressing longstanding weaknesses. But at the same time, the authorities need to guard against pressure to rollback progress. On public administration reform, progress is mixed as Greece is struggling to introduce performance-based management and address the taboo against mandatory dismissals.