The International Monetary Fund on Tuesday urged Greece to be “realistic” about its economic goals, and reiterated the longstanding concern the country may yet need additional debt relief.
The IMF board welcomed the agreement Athens reached with the European Union in June to reduce the country’s debt burden over the next five to 10 years but said it may be insufficient given the potential for political opposition to further reforms.
“For longer-term, we have doubts they can achieve and while growing at the rate expected and needed to bring down the debt,” Peter Dohlman, the IMF mission chief for Greece, told reporters.
Eurozone ministers agreed to extend maturities by 10 years on major parts of Greece’s total debt, a mountain that is more than double the country’s annual economic output.
In turn, Greece committed to a primary budget surplus — not counting debt repayments — of 3.5 percent of GDP through 2022, and 2.2 percent through 2060, with average economic growth of three percent a year.
However, the IMF’s annual report on the Greek economy and debt sustainability once again questioned those “very ambitious assumptions,” and said they would be hard to maintain for many years and would require onerous new spending cuts, including to pensions.
The Greek people have faced years of economic hardship, tax increases and high unemployment, and there already are signs of “reform fatigue,” the IMF said.
“Greece’s impressive fiscal adjustment to date has been achieved via a growth-unfriendly policy mix,” the report said, warning that “political pressures to roll back reforms may intensify ahead of the 2019 elections.”
Dohlman said while the country could meet the targets through 2022, “as debt matures and is replaced by more expensive debt, ability to service its debt becomes more challenging.”
The IMF staff projects Greece will see economic growth of two percent this year and 2.4 percent in 2018 but then will begin to slow.
Over a longer time horizon, the country can achieve average economic growth of about one percent and a primary surplus of at most 1.5 percent of GDP, around half the levels agreed with eurozone authorities.
And even those more modest targets would require “profound” reforms, the IMF said, “suggesting that it could be difficult to sustain market access over the longer run without further debt relief.”
Many IMF board members “cautioned that long-term sustainability remains uncertain and emphasized the need for realistic assumptions for primary balance targets and growth projections,” according to a statement.
The IMF notes that since 1945, only five euro-area countries have ever been able to maintain an average primary balance higher than 1.5 percent of output for a period longer than 10 years.
Dohlman said the fund believed “the crisis is now behind Greece, they’re entering a new chapter” but the country still needs “a sustained effort to tackle the crisis legacy.”
Under the current program with the eurozone, Greece’s debt is expected to fall to 178 percent of GDP by 2023, according to the fund estimates.
Greece currently owes the IMF around 10 billion euros, which it is expected to repay in full by 2024.