A report released Monday by the International Monetary Fund praises Greece for its efforts to reduce big deficits and improve its competitiveness, but warns that more structural reforms, including better tax collection, and actual public sector layoffs instead of attrition, are necessary to help the heavily indebted country overcome a deep recession.
The report calls Greece's reduction of its deficit over the past four years "exceptional progress ... by any international comparison" and notes that it has been helped by "unprecedented support" from its European partners, which have lent it some €173 billion ($226 billion) over the past three years, a sum equal to almost three quarters of the country's gross domestic product.
On the plus side, Greece has also improved its competitiveness by drastically reducing both its current account deficit and labor costs through a series of "far-reaching labor market reforms (that) have helped to realign ... wages and productivity at the enterprise level." It has also kept its financial sector stable "despite large losses associated with the debt restructuring" that took place early last year and hurt the banks that had amassed large amounts of Greek debt.
On the other hand, the report notes that Greece has been suffering from a "much deeper than expected" recession that has seen its economy shrink by over 20 percent.
It admits that fiscal progress "has been achieved primarily through recessionary channels," that is across-the-board spending cuts, deep wage cuts and rising taxes, "with unequal distribution of the burden of adjustment."
The report blames Greece's failure to tackle tax evasion, open up closed professions and shrink the bloated public sector for the depth of the recession.
The report notes that "the rich and self-employed are simply not paying their fair share" in taxes. It says that "substantial technical assistance (by Greece's creditors) has helped give the tax administration the technical tools it needs to succeed," but that tax collection goals set by the government are "very ambitious" and won't be met until the tax authorities become making tax authorities more independent from "what is still pervasive political interference."
The report urges Greece to break "the taboo against mandatory dismissals" in the public sector and warns that relying on voluntary retirements to reduce the number of civil servants will not be enough. It also says the government must "gear up" job creation and income support programs, by making more use of EU funds, to tackle the exceptionally high unemployment rate, which has reached 27 percent, and nearly 60 percent among youth under 24.
Finally, the report notes that Greece's European partners may be willing to further reduce the debt by forgiving more of it, like they did in 2012, or providing more low-interest aid — the report calls it "significant exceptional support on below-market terms" — in order to help it lower its debt from 156.9 percent of GDP at the end of 2012 to "substantially below 110 percent ... by 2022."
"While it will yet take some time for the country's situation to fully normalize, the government of Greece has come a long way in its adjustment effort," the report concludes.