IMF mission chief to Greece says ambitious surplus targets could constrain the economy

The head of the IMF mission in Greece, Peter Dolman, warned that the high primary surpluses Greece must achieve in coming years could compromise the economy’s growth.

In an interview with Sunday’s Kathimerini, the successor to Delia Velculescu said the bailout exit deal at the June 21 Eurogroup does indeed improve “Greece’s prospects for accessing the markets,” in the medium term, but added that primary surplus targets of 3.5 percent of GDP until 2022 and 2.2 percent until 2060 will “constrain the government’s ability to promote growth.”

“As a member of the eurozone, Greece has lost the ability to implement an independent monetary policy. The fiscal constraints mean that there are very few tools left with which to boost economic activity,” he said.

Referring to the 2.2 percent primary surplus target after 2022, Dolman said it will be very challenging to meet the forecasts of the European Commission’s Compliance Report in this fiscal environment. “At this time, we consider the realistic forecast for real growth in Greece is 1 percent annually. Our own research, based on the historical record, shows that a country cannot maintain a positive primary balance above 1.5 of GDP for such a long period.”

Given this predetermined fiscal path, Dolman said that it is very important to get the fiscal policy mix right and to implement reforms – in the labor and product markets, in banks, the judiciary and public administration – that will boost economic productivity.

With regard to the country’s banking system, he said credit growth continues to be negative in Greece. “The financial system, which should be the engine of recovery, is badly hindered by the size of NPEs on the banks’ books. With the necessary legal toolkit now in place, sales have begun, and we believe that the authorities should set more ambitious targets for the reduction of NPEs,” Dolman said in reference to Greek lenders’ nonperforming exposures.

As to the International Monetary Fund’s role in the post-bailout period, Dolman said that monitoring will be similar to in other countries in the context of the European Commission’s post-program surveillance.

“At the same time, we have our own program of surveillance, the post-program monitoring, which is activated in all the countries that have requested an IMF bailout and to which the IMF is exposed above a certain threshold.” The exposure to Greece, he said, is currently six times above that threshold and “based on the current repayment schedule, it will drop beneath it at the end of 2022.”