Despite several rounds of bailouts that have helped stabilise Greece’s massive public debt, the International Monetary Fund said in a report released on July 31 that optimistic projections of growth and a primary surplus have left lingering doubts about Athens’ long-term debt sustainability.

In their report, the IMF said Greece’s recovery is projected to strengthen in the near-term, with growth expected at 2% in 2018 and 2.4% in 2019, but will then slow to 1.2% in 2022 at a time when unemployment will drop as the output gap closes.

“External and domestic risks are tilted to the downside, including from slower trading partner growth, tighter global financial conditions, regional instability, the domestic political calendar, and risks of reform fatigue. In the long term, Greece’s aging population is expected to weigh down potential growth and put more pressure on the need to foster productivity.”

While a recovery is underway, IMF directors have also stressed that “significant crisis legacies and social pressures remain, and the risk outlook remains on the downside.” To address these issues, they have encouraged further efforts to rebalance fiscal policy, strengthen bank balance sheets, and reform product and labour markets to boost sustainable and inclusive growth.

Given the significant adjustment to date, Greece does not require further fiscal consolidation, while also noting that achieving the high primary balance targets comes at a cost to growth, including through high taxes and constrained social and investment spending.

The IMF supports a shift to a more growth-friendly and inclusive fiscal policy mix and welcomed the authorities’ commitment to fully implement the pre-legislated fiscal package in 2019 and 2020. The IMF Directors have called for further fiscal rebalancing from the Greek government to reduce direct taxes and increase targeted social spending in an effort to support growth and reduce still-high poverty.

On banks, the IMF urged the Greek authorities to accelerate efforts to address high non-performing loans and restore lending, by encouraging Greek banks to step up their use of the strengthened financial sector and regulatory frameworks that have created a better environment for addressing high non-performing exposures, including through the development of a secondary market for non-performing loans.

In the context of limited macroeconomic policy space, “further structural reform efforts are needed to boost productivity, competitiveness, and social inclusion,” according to the Fund, as Greece continues to score lower than its peers in terms of competitiveness indicators and lags behind in liberalising most service sector professions.

The IMF has also called out the Greek government and demanded that it do more to further improve the business environment, aiming to foster competition in product markets and preserve labour market flexibility through a prudent minimum wage policy and collective bargaining.

On tax enforcement shortcomings, the IMF underlined the importance of further public sector efficiency improvements and strengthened governance. The Greek authorities have been encouraged to provide adequate protection from liability of public officials, to implement the Anti-Corruption Action Plan with a focus on improving data collection and transparency, and to take measures to modernise the judiciary.

They also emphasized the need to protect achieved gains in the quality of official statistics by defending the statistical agency against any efforts to undermine its credibility, guaranteeing its professional independence, and addressing remaining shortcomings in reporting.

Last but not least on the debt relief measures the IMF directors “welcomed the debt relief measures granted by European partners and the improvement in debt sustainability over the medium term,” concurring that this relief, combined with a large cash buffer, will facilitate medium-term market access, while “over the longer term, these measures will significantly reduce gross financing needs”.

Some members of the IMF’s Executive Board cautioned that long-term sustainability “remains uncertain” and emphasised the need for realistic assumptions for primary balance targets and growth projections.

An agreement last month by European creditors helped facilitate the ease of loan repayment terms that ensure the medium-term sustainability for the debt and guaranteeing that the debt-to-GDP ratio will fall from a 188% of annual output this year to just below 140% by 2037.