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IMF Report: Pension Reductions, Tax and Labor Changes Needed

The International Monetary Fund (IMF) Greek Head Delia Velculescu held a conference call with reporters on Friday. She stated that Greece’s growth outlook remains weak, and pointed to further deep reforms necessary. She also said that debt relief from Greece’s European creditors was also necessary. “The fund expects the Greek economy to begin recovering next year, though long-term growth prospects are subdued,” said Velculescu. “We are not advocating for more austerity, we are advocating for less.”
The IMF’s statement on Greece said that the country made significant progress in unwinding macroeconomic imbalances, but growth has remained elusive and risks are high. Despite notable adjustments for a country belonging to a currency union where policy levers are limited, Greece was found to have made impressive adjustments, but growth continues to be elusive.
The report points to deep reforms in key areas without long-term support from its European partners. The structure of the budget should be improved with growth-friendly policies. The report states that as far as social spending is concerned, recent pension reforms aim to lower spending by 1 percent of the GDP in the medium-run. “This is a welcome and undoubtedly politically difficult step in the current circumstances. However, it is well short of what is needed, considering that the deficit of the pension system remains highly unsustainable, at 11 percent of GDP (compared to an average of 2½ percent in the euro-area),” notes the report. “To create space for needed social spending to protect vulnerable groups and provide essential public services, a further reduction in current pensions is thus necessary and can be implemented by unfreezing current pensions and applying the new benefit formula. Relying instead on further across-the-board discretionary spending cuts, automatic or otherwise, should be avoided, as it is neither growth enhancing nor sustainable.”
Non-performing loans are stressed as another problem and are called to be reduced rapidly in order to create conditions for a resumption of credit to the economy. “NPLs have reached close to 50 percent of total loans, the second highest level in the euro-area,” states the report. “This reflects not only the effects of the economic downturn on individuals’ and businesses’ capacity to pay, but also a weak payment culture. Assuming that banks can grow out of the NPL problem is not credible, as growth ultimately depends on lending to dynamic enterprises, which is constrained if banks instead keep alive unproductive and indebted ones.”
The report points to Greece being at a crossroads needing bolder efforts to address key challenges. It acknowledges the sacrifices and “the recent humanitarian challenge caused by the flow of refugees into Europe has added to the burden on the Greek people. This calls for the full support of Greece by its European partners. While Europe has already demonstrated its support by providing Greece with the time needed to adjust, further debt relief remains essential. Greece, for its part, should seize the opportunity to make steady but resolute progress toward addressing its remaining challenges.”
To read the full IMF report on Greece CLICK HERE

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