IMF's Velculescu sees economic recovery from 2017 in Greece

Greece needs further cuts to pensions and a fairer distribution of the tax burden but should see its economy begin to recover from the following year, the International Monetary Fund (IMF) concluded on Friday. 

"In light of the impressive fiscal consolidation to date—not least the most recent fiscal package legislated in 2015-16—Greece does not require further adjustment to reach and maintain unprecedented primary surpluses, which would not only be detrimental to growth, but are also difficult to sustain in view of likely pressures given persistently high unemployment. However, the composition of the adjustment, which has relied on tax increases on narrow bases, adds significant risks to the budget and deters investment and employment," the IMF said, in the Article IV Consultation report published on Friday.

The head of the IMF mission to Greece Delia Velculescu, replying to questions put during a conference call, predicted the start of economic recovery in 2017 and repeated that the IMF will only participate with new funds in the Greek programme if there is a substantial relief of the country's debt.

The IMF urged a fiscally-neutral rebalancing of policies over the medium term toward lower pensions and a fairer distribution of the tax burden so that the public sector is able to provide adequate services and social assistance to vulnerable groups, while creating the conditions for investment and growth. 

Unaffordable pensions

"Spending remains exceedingly focused on unaffordable pensions provided to current retirees, which crowds out other needed social spending to protect vulnerable groups, including the unemployed," the report said, noting that the Greek pension system was running a highly unsustainable deficit of 11 pct.

"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," the report said.

It also urged the government to focus more on fighting tax evasion, noting that debts toward the state sector had now reached 70 pct of GDP, the highest percentage in the Eurozone, while tax collection rates had fallen to less than 50 pct. It also criticised excessively generous tax exemptions for middle incomes, which it said resulted in a shortage of revenues necessary welfare spending on the most vulnerable groups, combined with high taxation rates that acted as a disincentive to working in the formal economy . It proposed a reduction in income tax rates combined with a reduction of overly generous tax exemptions.

It once again raised the issue of debt relief for Greece, estimating that this was necessary even with a full implementation of the current programme, and noted that the humanitarian crisis caused by the flow of refugees to Europe has further increased the burden on Greeks, who needed the full support of their European partners.

"Even with full implementation of this demanding policy agenda, Greece requires substantial debt relief calibrated on credible fiscal and growth targets . Despite very generous debt relief from private and official creditors, debt has continued to rise, reaching unsustainable levels," the report said.

Lastly, it urged action to reduce the number of non-performing loans in order to allow a resumption of credit in the economy, noting that these were currently 50 pct of total loans, the second highest level in the Eurozone.

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