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Greece making progress with reforms, IMF report finds

Christine Lagarde
Greece is making progress in carrying out reforms and overcoming problems, despite a "serious and socially painful recession," according to a report by the International Monetary Fund (IMF) mission in Greece released on Monday.
"Overall, while it will yet take some time for the country’s situation to fully normalize, the government of Greece has come a long way in its adjustment effort," the report concluded and stressed that adopting the necessary policies for the next leg of the adjustment effort must take priority.
Noting that the recession resulting from the effort to correct the country's "daunting" adjustment challenges was much deeper the expected, the report also highlighted Greece's achievements.
"Progress on fiscal adjustment has been exceptional by any international comparison, with the primary balance set to have cumulatively improved by 10 percent of GDP by end-2013, amid a contraction in GDP of more than 20 percent.
    "Greece has also made a significant dent in its competitiveness gap. Far-reaching labor market reforms have helped to realign nominal wages and productivity at the enterprise level. We estimate that the competitiveness gap as measured by Unit Labor Costs (ULC) has been reduced by close to two-thirds since 2010, while the current account deficit has come down cumulatively by about 10 percent of GDP," the report noted.
The report also notes the "very strong and persistent determination on the part of Greece and its European partners to do whatever it takes to restore Greece to a sustainable situation inside the euro area" but points out that insufficient structural reforms had meant that the adjustment has been achieved "primarily through recessionary channels, with unequal distribution of the burden of adjustment".
Among the problems highlighted are a failure to tackle tax evasion and ensure a fairer distribution of the tax burden and stubbornly high prices, in spite of lower wages, so that wage earners and pensioners bore a disproportionately high share of the adjustment burden.
It called for "decisive corrective actions" in each of these areas, as well as an end to the taboo on mandatory public-sector dismissals.
IMF officials pointed out that, even though Greece’s European partners have agreed to reduce the medium-term primary balance target from 6½ to 4½ percent of GDP and to length the adjustment period to 2016, Greece will still need some further structural fiscal adjustment to reach its medium-term fiscal target.
The key challenge, they stressed, is to define a way for the Government to achieve this while adhering to its promise to avoid further across-the-board spending cuts. It called for "deeper political commitment" to tax administration reform, "mandatory redundancies" in the public sector to provide room to hire better qualified staff and action to provide a strong social safety net to assist those most affected by the crisis.
The report was generally upbeat about Greece's banking system, forecasting a fully recapitalised system by mid-2013 and a halt to the "deep de-leveraging" of recent years, but warning that serious policy challenges still lay ahead. Among these it listed avoidance of "undue government interference," and urged rapid re-privatisation of the banking system and action to stem the rise of nonperforming loans.
It advised a focus on "deepening structural reforms" to boost economic recovery, via reduced barriers to markets and more privatisation, warned against "attempts to artificially engineer growth" - especially through tax incentives - and called for action to restore badly dented investor confidence.
For the last, it emphasised the need for political stability and broad support for the adjustment programme, stressing "that only with full and timely policy implementation and commitment to the program can the fundamentals for a recovery be put fully in place and the fear of adverse outcomes permanently put to rest."
It also stressed that Greece's public debt remains much too high and that the country might need additional help to bring its debt below the target of 110 percent of GDP by 2022, welcoming the fact that Greece's European partners have now accepted that Greece might need this assistance and committed to provide this, if needed.
"With Greece’s debt now overwhelmingly held by the official sector, such a commitment is essential to assure creditors that a credible framework for dealing with Greece’s debt overhang is now in place," the report noted.

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