The International Monetary Fund warned that risks to Greece’s economic reform plan remain high and said European nations will need to provide more funds and debt relief to the country.
“The program is moving in the right direction, but the challenges ahead remain enormous,” the IMF staff wrote in a report on Greece released today. “Timely delivery of Greece’s European partners’ undertakings on debt relief and financing is crucial for program success.”
The fund agreed to disburse 3.2 billion euros ($4.3 billion) to Greece earlier this week after the government approved new budget cuts, received more favorable aid terms from European nations and conducted a bond buyback. The fund estimates that the country will need extra funding of as much as 9.5 billion euros for 2015-2016, and see “good prospects” Europeans will finance it if the country implements policies attached to the current loan.
While the IMF agreed to a plan by Greece and Europeans to lower the Mediterranean nation’s debt to 124 percent of gross domestic product in 2020, from a peak of 179 percent this year, measures announced so far won’t accomplish all the decline. The IMF has assurances from Europeans that they will provide debt relief equaling 1.4 percent of GDP next year and take additional measures in 2015, according to the report.
With another pledge to take debt “substantially below” 110 percent of GDP by 2022, “time will tell what the full commitment will require,” staff wrote. It recommended a combination of haircuts and near-zero interest rates on bilateral loans and lower borrowing costs from the European bailout fund.
The report welcomed Greek Prime Minister Antonis Samaras’s efforts after political turmoil forced a suspension in international aid.
Still, the fund urged him to tackle “entrenched vested interests” that have meant little progress on curbing tax evasion and maintained a “bloated and unproductive state sector.”
While the coalition government, formed in June, has delivered “important upfront changes in some areas, it still needs to demonstrate political resolve in some of the most difficult ones,” the report said.
Samaras’s New Democracy party forged an alliance with socialist Pasok and Democratic Left in June, promising to implement reforms to keep the country in the 17-nation euro region. The 13.5 billion euros of new cuts and tax measures for the next two years have led to the government’s majority in parliament falling to 163 of 300 seats from the 179 seats it held in June.
The report said the government needed to match “results with rhetoric” on selling state assets, which will be used to pay down debt, and said the performance so far was “extremely disappointing.”
Continued progress will be “a constant challenge that will require intensive and uninterrupted efforts,” the IMF said in its report. “Although euro area politicians now appear to have pulled behind keeping Greece in the euro, implementation risks will remain elevated in Greece for some time, until the political situation becomes less fragile.”
The economy will shrink 4.2 percent this year after contracting 6 percent last year, the IMF projected in the report, which also forecast 0.6 percent growth in 2014.
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