A new report from the International Monetary Fund (IMF) released on Wednesday estimated that the Greek economy will rebound after the pandemic by growing by 3.3% this year and an amazing 5.4% in 2022.
The IMF says that the country will see this impressive growth because it reacted swiftly and proactively in responding to the pandemic. The IMF said it expected the Greek economy to rebound in this impressive manner in a statement issued after the conclusion of the 2021 Article IV consultation mission.
Greece entered the pandemic before it had been completely recovered from the lingering deep recession of the 2010s, but the country has demonstrated resilience in facing all the many difficulties posed by the coronavirus pandemic, it said.
The Greek economy did indeed contracted by 8.2 percent in 2020, which was a difficult pill to swallow, but a better showing than expected given Greece’s high dependence on tourism and the many financial vulnerabilities it was already facing at the time.
Despite the fact that young and part-time workers experienced a sharp drop in employment during the past year, the government provided among the largest on-budget fiscal stimuli in the entire euro zone, which the IMF stated prevented a spike in corporate distress and kept workers part of the labor market.
Greek economy heavily supported during pandemic
The IMF further concluded in its report that supervisory and European Central Bank accommodations shielded the banking sector in Greece and kept financial conditions highly supportive throughout.
The IMF statement said: “Investment through Next Generation EU (NGEU) grant funding, pent-up consumption funded by deposit drawdown, and tourism resumption are expected to be the main drivers of the recovery, with growth projected at 3.3 percent this year, accelerating to 5.4 percent in 2022.
“The permanent output loss from the pandemic (‘scarring”) is projected to reach 3 percent, suggesting policy efforts should focus on facilitating both debt workouts and resource reallocation.”
Higher investment, economies of scale from greater company size, and increased export orientation would keep the current account deficit in check, it stated.
Together with the RRFs structural reform agenda, productivity growth will be enhanced, the country will be moved to investment grade in its credit rating and long-term debt sustainability will increase, it noted.
Meanwhile, the expansion of output in the Greek economy, coupled with lower tax rates and digitization would widen the tax base and avoid “cliff effects” when the NGEU funding dries up after the pandemic is completely over, IMF experts believe.
Public debt in Greece to peak this year
“Following a spike in 2020, Greece’s public debt is projected to peak in 2021 and decline gradually over the medium-term, albeit remaining at higher levels than forecast before the pandemic,” it noted, adding that “Greece’s public debt remains sustainable over the medium-term, predicated on the negative interest rate-growth differential and a gradual return to primary surpluses.”
The government’s large cash buffer and active liability management further mitigate refinancing risks, while Greece’s ability to service its debt under severe circumstances depends on continued regional support.
The report states “While a feasible set of policies and interest rate trajectories could deliver sustainable debt dynamics over the long-term, alternative scenarios suggest that the uncertainty about the long-term neutral rate and risk premia is too high to reach a firm conclusion.
“This marks a departure from staff’s previous long-term DSA, published in 2018, which also acknowledged large uncertainty, but nonetheless concluded that public debt sustainability was not assured under a realistic set of macro-fiscal assumptions.”
The organization emphasized in its findings that the near-term focus should be on healthy outcomes and that medium-term fiscal sustainability objectives should not be achieved at the expense of growth, especially considering the impact of two crises on youth experiencing high unemployment rates, the Fund noted.
Pandemic-related measures imply a primary deficit of around 7.25 percent of GDP in 2021 with much of the support frontloaded ahead of NGEU disbursements in line with previous staff recommendations.
While the headline primary deficit for 2022 is expected to recover to 1 percent of GDP, the underlying fiscal stance, excluding temporary COVID-19 measures, remains expansionary by about 2 percent of GDP, according to the IMF.
From a cyclical perspective, its experts say, the case for further economic stimulus is weak given the rapid closing of the output gap under the baseline, but it could help reduce scarring risks and support job creation — which is expected to lag behind the output recovery, provided that the stimulus is properly spent.