Press Release No. 17/294

IMF Executive Board Approves in Principle €1.6 Billion Stand-By Arrangement for Greece

July 20, 2017

• Arrangement approved in principle, meaning it will become effective only after the Fund receives assurances from European partners on debt sustainability and provided that the economic program remains on track
• Greece’s economic program focuses on policies to restore macroeconomic stability in the medium run and facilitate market access
• Program aims to rebalance budget toward more growth-friendly and socially-inclusive policies in the long run

The Executive Board of the International Monetary Fund (IMF) today approved in principle an SDR 1.3 billion (about €1.6 billion, or US$1.8 billion, 55 percent of quota) precautionary Stand-By Arrangement (SBA) for Greece.

The arrangement, which supports the authorities’ economic adjustment program, has been approved in principle, which means it will become effective only after the Fund receives specific and credible assurances from Greece’s European partners to ensure debt sustainability, and provided that Greece’s economic program remains on track. A second Executive Board decision is needed to make the arrangement effective. The arrangement will expire on August 31, 2018, shortly after the expiration of the European Stability Mechanism program.

Following the Executive Board’s discussion, IMF Managing Director and Chair of the Executive Board, Christine Lagarde said in a statement:

“I strongly welcome Greece’s new economic adjustment program, which focuses on policies that will help restore medium-term macroeconomic stability and growth, and supports the authorities’ efforts to return to market financing on a sustainable basis. The program provides both breathing space to mobilize support for the deeper structural reforms that Greece needs to prosper within the euro area, and a framework for Greece’s European partners to deliver further debt relief to restore Greece’s debt sustainability.

“The newly-legislated measures broadening the income-tax base and reforming pension spending are critical to rebalancing the budget toward more growth-friendly policies. In the medium run, they will help achieve an ambitious primary surplus target of 3.5 percent of GDP. However, this target should be reduced to a more sustainable level of 1.5 percent of GDP as soon as possible, to create fiscal space for better targeting social assistance, stimulating public investment, and lowering tax rates to support growth. Protecting vulnerable groups, while maintaining fiscal soundness, is key to preserving the sustainability and fairness of Greece’s adjustment effort.

“Rehabilitating the financial sector is essential to restoring credit and fostering growth. The new program will support efforts to reduce Greece’s exceptionally high non-performing loans by strengthening the debt restructuring legal framework. Moreover, to safeguard the banking sector’s soundness and facilitate the rapid relaxation of capital controls, the supervisory authorities should take additional steps, including undertaking an updated asset quality review and stress test, to ensure that banks are adequately capitalized before the end of the program.

“Despite progress on the structural front, Greece’s overarching challenge remains the liberalization of restrictions that impair its investment climate. Thus, the authorities should reconsider their plans to reverse cornerstone collective-bargaining reforms after the end of the program, and should instead focus on redoubling efforts to open up still protected product and service markets, so as to facilitate investment and create new jobs. They should also redouble efforts to protect the credibility of the statistical agency and guarantee its independence.

“As we have said many times, even with full program implementation, Greece will not be able to restore debt sustainability and needs further debt relief from its European partners. A debt strategy anchored in more realistic assumptions needs to be agreed. I expect a plan to restore debt sustainability to be agreed soon between Greece and its European partners. Effectiveness of the new Stand-By Arrangement is contingent on this agreement on debt relief, as well as implementation of the program.”

ANNEX

Recent Economic Developments

GDP was flat in the last three years. The economy has stabilized after a crisis of confidence in 2015, but economic uncertainty, limited access to financing, record-high non-performing loans, and remaining capital controls are holding back investment.

Growth resumed modestly in the first quarter of 2017, on the back of resilient consumption and an inventory buildup. The labor market has recovered gradually, although mainly due to an increase in part-time employment. Poverty and inequality remain among the highest in the euro area.

The primary fiscal balance was in surplus in the last two years, supported by ongoing fiscal consolidation. Last year, the surplus exceeded the authorities’ fiscal target by a large margin, owing to additional spending compression relative to budget, better-than-expected wage and profit outturns, and also large one-off factors. This year, the cumulative primary balance outturn through May 2017 is lower than a year ago, due to lower tax revenues and EU investment-related transfers.

Program Summary

The Greek authorities’ economic program is narrowly focused on policies that can help restore macroeconomic stability in the medium run and facilitate market access. It seeks thereby to provide breathing space to mobilize broad political support for the deeper structural reforms needed for Greece to liberalize its economy and prosper within the euro area in the long run. The program will also provide a framework for Greece’s European partners to deliver debt relief to restore Greece’s debt sustainability.

Fiscal policy: The program focuses on rebalancing the budget toward more growth-friendly and socially-inclusive policies in the long run. A package of income tax and pension reforms—aimed at reducing exceptionally generous tax exemptions for the middle classes and unaffordably high pension spending—has been legislated upfront and will be implemented once the output gap narrows. These measures help support the authorities’ ambitious medium-term primary surplus target of 3.5 percent of GDP agreed with the European partners for 2019-22. After 2022, the surplus target is expected to be lowered—the level remains to be agreed in the context of debt discussions—and the resultant fiscal space be used to bolster Greece’s social safety net, boost public investment, and lower taxes to support jobs and growth

Financial sector reforms: The financial sector strategy is narrowly focused on creating the conditions for addressing high non-performing loans by strengthening and implementing the legal framework for debt restructuring. The authorities are committed to relaxing capital controls rapidly but prudently, while safeguarding financial stability.

Structural reforms: In addition to preserving the cornerstone labor market reforms during the program period, the program supports a reform of collective dismissals and implementation steps for ongoing reforms fostering competition, liberalizing Sunday trade and select closed professions, and facilitating investment.

Debt relief: Greece’s debt remains unsustainable. Further discussions are needed to converge on a strategy based on realistic assumptions and on a broadened scope for debt relief to restore Greece’s debt sustainability.

Growth Expectations

Predicated on full implementation of the reforms above, output is projected to rebound strongly over the medium term. It is projected to grow by 2.1 percent this year and 2.6 percent next year, on the back of continued resilient private consumption and a recovery of investment from low levels, supported by EU funds and improved confidence. Over the long run, growth is expected to converge to its potential steady-state rate of 1 percent, driven by the effects of continued structural reforms required to overcome the negative impact of population aging.

Additional Background

Greece became a member of the IMF on December 27, 1945, and has a quota of SDR 2.4 billion (about €3.0 billion, or US$3.4 billion).

For additional background on the IMF and Greece, see:

http://www.imf.org/external/country/GRC/index.htm