IMF approves €2.2bn disbursement for Greece

The International Monetary Fund (IMF) has completed its fifth review of Greece’s economic performance and approved the immediate disbursement of SDR1.9bn (about €2.2bn) in financial aid. This brings total IMF financing under a stand-by programme for Greece to about €20.3bn.

The IMF also approved changes in performance criteria and waivers of non-observance of performance related to the government’s primary cash balance, privatization receipts and external payments arrears. It also approved waivers covering external payments arrears following minor data revisions after the programme was approved.

The stand-by programme was approved on May 9, 2010 and is part of a joint package of financing with eurozone member states totalling €110bn over three years.

Christine Lagarde, IMF managing director, said Greece had made substantial progress including a large reduction in the fiscal deficit, but warned more needed to be done. “The program is in a difficult phase, with structural reforms proceeding slowly, the economy weak and the external environment deteriorating. This has warranted a substantial downward revision to the medium-term outlook.”

The establishment of a national unity government and the endorsement of the rescue programme by the country’s major political parties were important steps. The government should use its wider mandate to fully implement the programme which is the best way to help Greece manage the risks it now faces, she said.

“Fiscal adjustment remains the most immediate challenge for the authorities,” Lagarde said. The recent enactment of new measures will help correct implementation slippages. Adjustment efforts will have to be supported by a quick implementation of the fiscal reforms needed to downsize the public sector and strengthen tax collection.

Another key shallenge is to preserve financial sector stability. Plans to recapitalize banks are in place alongside a revised resolution framework for banks in trouble that can help avoid disruptions to depositors and contain public sector costs. Viable banks should continue to have access to liquidity support, the IMF said.

The government should accelerate its privatization programme to boost investment, growth and debt reduction.

Structural reforms to improve competitiveness and plans to reduce high labour taxes should also be accelerated, alongside the liberalization of closed professions.

Private sector involvement and prolonged support at low interest rates from Greece’s European partners are crucial to reduce the country’s debt to a sustainable level. Near-universal participation in the proposed private debt exchange will be important to achieve a sustainable debt position, meet financing needs, and ensure continued IMF support, Lagarde said.

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