Credit but a recommendation to continue reforms from the International Monetary Fund – expectations of growth of 2.5% this year and 2% in 2024

Written by Tasos Dasopoulos

The recovery of the economy to higher levels than before the pandemic, a significant reduction in debt and the improvement of bank operation and profitability, this is what the IMF records in the conclusions of its assessment based on Article IV.

In its report, the International Monetary Fund team expects growth of 2.5% for this year, but it is more conservative than the Ministry of Finance’s prediction for 2024 of growth of 2%. Growth, according to the Fund, will come from continued growth in private consumption which – as mentioned – has been resilient despite rising inflation and rising investment through and use of Recovery and Resilience Fund funds. It highlights the fact that Greece is achieving high growth rates this year (about 2.5% in the first half of the year) despite the devastation caused by recent floods.

In the medium term, it is noted that after the end of the recovery fund, due to the demographic problem, growth will decline to about 1.3%.

Credit for hunting tax evasion

On the reform front, the Fund also commends the efforts made by the authorities to tackle tax evasion, including targeted reforms for the self-employed. Continued efforts to encourage digital transactions and simplify tax incentives will improve the efficiency of revenue collection. Given the huge investments planned under the Recovery Fund, the public investment management framework must be strengthened.

However, the IMF also records the promotion of major changes such as modernization of labor legislation and unemployment offices, improved employment through linkage of public services and increased work of the Competition Commission which have contributed to market competitiveness.

Economic inflation

The Fund expects Greece’s inflation rate to fall to 2% in 2025. However, it notes that more extreme weather events could lead to disruption of tourism and activities in general. Conversely, accelerating ambitious structural reforms, coupled with stronger-than-expected market reactions to the investment grade upgrade, could improve growth prospects. Inflation could remain high as a result of weather-related shocks as well as domestic pressures from recent and expected increases in wages and pensions.

Banks

Credit also goes to the IMF for improving the banking system by implementing appropriate policies that have been implemented. It is noted that asset quality has improved further, with the non-performing loan ratio falling to less than 5% in the second quarter of 2023 across the four major commercial banks, supported by ongoing securitization operations under the Hercules programme. The decrease in the non-performing loan ratio, coupled with the increase in net interest margins, contributed to achieving a strong recovery in bank profits and enhancing capital adequacy. Amid continued deposit inflows driven by strong growth, the banking system has also maintained large liquidity buffers, despite the ECB’s large disbursements of targeted long-term refinancing operations (TLTROs).

Proposals

The International Monetary Fund indicates in its proposals that prudent fiscal policy should continue to produce primary surpluses, with positive growth rates. In fact, it confirms the government’s goals of achieving a primary surplus of 1.1% of GDP this year and more than 2% in the medium term, which, as emphasized, will help reduce the debt escalation more quickly.

It also proposes accelerating the green and digital transformation, as well as providing incentives aimed at increasing the participation of youth and women in the labor market to reduce unemployment faster.