IMF predicts Greek economic growth of 3.3% in 2021, 5.4% in 2022 with EU support
Greece has responded quickly and proactively to the pandemic, the International Monetary Fund (IMF) said in a report released on Wednesday.
In a statement released after the conclusion of the 2021 Article IV consultation mission, the IMF said it expects the Greek economy to grow 3.3% this year and 5.4%. in 2022.
Greece entered the pandemic with an unfinished recovery, but the country has shown resilience in the face of COVID-19.
The economy contracted 8.2% in 2020, better than expected given Greece’s heavy reliance on tourism and pre-existing vulnerabilities.
The government has put in place one of the biggest fiscal incentives in the euro area, which has avoided a spike in business distress and kept workers attached to the labor market, although young people and part-time workers have experienced a sharp decline in employment.
The ECB’s oversight and accommodation protected the banking sector and maintained very favorable financial conditions, the IMF said in the statement.
Specifically, the IMF statement said:
“Investment through Next Generation EU Grant Funding (NGEU), pent-up consumption financed by deposit levies and the recovery of tourism are expected to be the main drivers of the recovery, with projected growth of 3 , 3% this year, accelerating to 5.4% in 2022.
“The permanent loss of production due to the pandemic (‘scars’) is expected to reach 3%, suggesting that policy efforts should focus on facilitating both debt settlement and reallocation of resources. “
Higher investments, economies of scale through larger firm size and increased export orientation would bring the current account deficit under control and, together with the RRF structural reform program, increase growth by the productivity.
It would also move the country to investment grade and anchor long-term debt sustainability, he noted.
Expanding production, lowering tax rates and digitization would broaden the tax base and avoid cliff-edge effects when NGEU funding dries up.
“After a peak in 2020, Greece’s public debt is expected to peak in 2021 and gradually decline over the medium term, while remaining at higher levels than expected before the pandemic,” he noted.
The IMF report added that “Greece’s public debt remains sustainable in the medium term, due to the negative interest rate differential and a gradual return to primary surpluses”.
The government’s large cash buffer and active liability management further mitigate refinancing risks, while Greece’s ability to service its debt in the event of a severe shock depends on continued regional support.
“While a workable set of policies and interest rate trajectories could generate long-term sustainable debt dynamics, alternative scenarios suggest that uncertainty about the long-term neutral rate and risk premia is too high to come to a firm conclusion.
This marks a departure from the previous long-term IMF staff DSA, released in 2018, which also recognized great uncertainty, but nonetheless concluded that public debt sustainability was not assured under a realistic set of macro-fiscal assumptions, ”he said.
The mission stressed that the short-term focus should be on health outcomes and that medium-term fiscal sustainability goals should not be achieved at the expense of growth.
This needs to be especially taken into account because of the impact of two crises on young people with high unemployment rates, the fund noted.
The pandemic-related measures imply a primary deficit of around 7.4 percent of GDP in 2021, with much of the aid expected ahead of NGEU disbursements, in line with previous IMF staff recommendations.
While the overall primary deficit for 2022 is expected to return to 1% of GDP, the underlying fiscal stance, excluding temporary measures related to COVID-19, remains expansionary by around 2% of GDP.
From a cyclical point of view, the case for further stimulus is weak given the rapid reduction in the output gap under the baseline scenario, according to at the IMF.
However, it could help reduce the risk of scarring and support job creation which is expected to lag behind the resumption of production provided the stimulus is used correctly.
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