The International Monetary Fund said Greece’s economy would only grow by just under one per cent in the long run given the constraints of its bailout programme, but should meet the fiscal surplus target preferred by most IMF directors.
In its annual review of Greece’s economic policies, the IMF said most of its board directors favour a Greek fiscal surplus target of 1.5 per cent of gross domestic product by 2018, while some directors favour the higher 3.5 per cent target sought by Greece’s European lender group.
The fund did not identify which directors favoured the higher target or how many of its 24-member board shared that view.
The rare split among IMF’s directors reveals some divisions in their views of Greece’s fiscal performance and debt sustainability as the IMF considers whether to participate in a new bailout for Greece needed by mid-2018.
The IMF has abstained from financial involvement in Greece’s third bailout from European lenders since 2010, but remains actively engaged in negotiations on a new deal to start in mid-2018.
IMF managing director Christine Lagarde and other senior officials have argued that a Greek fiscal surplus target of 3.5 per cent of GDP is too ambitious and massive debt relief or further austerity measures would hurt growth.
Germany, which contributes the most to Greece’s bailout, faces national elections in September, and is strongly against any discussion of debt relief before Greece reaches the bailout target.
The IMF review did not address whether the fund would commit financial resources to Greece. The fund said that the directors recognised that austerity measures and reforms have “taken a heavy toll on society that, together with high poverty and unemployment rates, has contributed to a slowdown in the reform implementation”.
“Most directors agreed that Greece does not require further fiscal consolidation at this time, given the impressive adjustment to date.”
Despite the divisions over the fiscal target, the IMF said the directors called for Greece to broaden its personal income tax base and rationalise pension spending to make room for lower tax rates and more aid to the poor.
Greece is expected to need a new tranche of aid under the current €86 billion programme by the third quarter of this year, and the head of Greece’s bailout fund said that a further slice of aid could only be granted once the IMF decides to formally join the programme.