IMF: Greece making progress but must do more on taxes

By Anna Yukhananov

10:04am EDT

WASHINGTON (Reuters) - Greece has made progress in reducing government debt and improving its competitiveness, but needs to follow through on structural reforms to ensure its economy recovers, the IMF said on Monday after a mission visit to the country.

The International Monetary Fund, one of the indebted euro zone country's international lenders, said Greece must do more to fight its 'notorious' tax evasion and open up labor competition to ensure the burden of austerity does not fall disproportionately on wage-earners and pensioners.

"Decisive corrective actions are needed in each of these areas to promote an early supply response and achieve a more balanced distribution of the burden of adjustment," the IMF said after its visit. "The mission welcomes that the government is refocusing its program in recognition of these problems."

Measures to cut Greece's budget deficit and make its economy more competitive are key conditions of its 240 billion euro ($314 billion) bailout from the European Union and the IMF.

But tax evasion is endemic in Greece, making it more difficult for the government to shore up its finances and denting support for the pro-bailout ruling coalition.

Middle-class wage earners and pensioners, the hardest-hit group in Greece's six-year recession, account for 70 percent of total personal income declared.

The Fund called on the Greek government to strengthen the independence of the tax administration to make it easier to reform the system. It also said Greece must lay off public workers to be able to hire new qualified staff, and not just rely on voluntary departures.

"The taboo against mandatory dismissals must be overcome," the IMF said.

Under Greece's current bailout plan agreed in November, Athens has to cut 150,000 public sector jobs overall from 2010 to 2015, about a fifth of the total, through hiring curbs, retirement and dismissals.

Lay-offs are a sensitive issue in Greece where unemployment has hit a record high of 27.2 percent and the economy is now in its sixth year of recession -- though recent polls show most Greeks want the reform of the public sector.

As a condition for receiving further bailout funds, Greek lawmakers last month approved a plan that makes it easier to fire government employees for disciplinary reasons, and also extends an unpopular property tax and opens up professions such as accountants and bakers.

DEBT TOO HIGH

The IMF said Greece has made "exceptional" progress on reducing its fiscal deficit since 2010, with its primary budget surplus, or the surplus before taking into account debt financing costs, set to improve by 10 percent by the end of the year.

But the country's public debt remains "much too high," the Washington-based lender said.

"It is, therefore, very welcome that Greece's European partners have now accepted that Greece could need significant exceptional support on below-market terms in order to restore debt sustainability and that they have committed to provide additional relief, if needed," the IMF said, in order to ensure Greece's debt falls below 110 percent of GDP by 2022.

"Such a commitment is essential to assure creditors that a credible framework for dealing with Greece's debt overhang is now in place."

Greece's finance minister, Yannis Stournaras, said the country would seek more debt relief if the government managed to achieve a primary surplus this year.

And Greece's international lenders have also agreed they could give the country further debt relief, probably in the shape of lower financing costs, if it meets its fiscal targets.

The critical long-term goal for Athens is to bring its debt as a proportion of GDP down to a manageable size. The ratio currently stands at more than 160 percent. The IMF has said it must be cut to 120 percent by 2020 to be "sustainable".

The IMF has insisted on strict debt targets as a condition of helping Greece get its economy in shape, but the Fund has also been criticized for failing to predict Greece's deep recession.

The IMF mission blamed the lack of political resolve in Greece for destroying public and market confidence, which caused the recession in recent years, and called on the Greek government to build public support for reforms.

"The lessons of the recent past are that only with full and timely policy implementation and commitment to the program can the fundamentals for a recovery be put fully in place and the fear of adverse outcomes permanently put to rest," the Fund said.