According to the IMF’s assessment, while the programme includes some very difficult measures, reforms have slowly started to deliver results. The economy is rebalancing, and competitiveness is improving. A return to positive economic growth is currently projected for the first half of 2012, with that scenario depending on full implementation of difficult structural reforms.

“Greece’s debt sustainability hinges critically on timely and vigorous implementation of the adjustment programme, with no margin for slippage, and continued support from European partners and private sector involvement”, the IMF’s new Managing Director, Christine Lagarde, said in a statement following a meeting of the Fund’s Executive Board.

In an interview, Poul Thomsen, head of the IMF’s team, explains what has been achieved so far and discusses the challenges ahead for Greece.

IMF Survey online: The prevailing view in the markets appears to be that political and social support for the programme is waning. Will the Greek government be able to deliver on its reform programme?

Thomsen: There is no doubt that the programme has entered a crucial phase―the part where the tough measures are beginning to take effect, and yet the benefits are not yet manifest in a way that everyone can see and feel. And reforms have slowed down somewhat in the face of intense pressure from some vested interests. That said, the government deserves credit for persevering with a number of difficult reforms during the past year, and the fact is that the programme has up to now delivered most of what it set out to do. The economy is rebalancing, according to the most recent data. Exports have increased by 22 per cent, and competitiveness is improving, in part because of a decline in labor costs. Inflation, adjusted for taxes, is running well below the euro zone average.

Greece has also made progress on structural reforms that were unthinkable before. Pension reforms are the most far-reaching that virtually any country has done in one step. Labour market reforms are also very comprehensive, and the government has started opening up closed professions. On fiscal policy, the authorities have met all quarterly fiscal targets since the start of the programme, and continue to do so, most recently those for March 2011. There has been a reduction in the fiscal deficit of more than 5 per cent in 2010, an impressive achievement in a country experiencing a severe recession.

IMF Survey online: But there have been problems along the way?

Thomsen: As we have said from the beginning, this is a very ambitious programme. With respect to fiscal policy, it proved difficult to control spending at lower levels of government. Mindful of these risks, the government has kept developments under close review, and under-executed the budget at the state level, thereby ensuring that the overall targets were met. In the medium- and long-term however, this is not a viable strategy. Without structural changes to fiscal policy, there is a risk that the budget deficit will become entrenched at 10 per cent or more. And without broader-based structural reforms to promote growth, the chances of a recovery by the end of the year or early next year would be diminished. Responding to this, the government has formulated an impressive fiscal programme, which has been approved by Parliament. The targets would see Greece achieve a deficit of 7½ per cent of GDP in 2011, and a deficit below 3 pe rcent of GDP by 2014, as required by the Maastricht treaty.

IMF Survey online: Even with these new measures, there is a need for more external financing. What has been agreed?

Thomsen: In light of the current difficult financing circumstances, Greece would be unlikely to regain access to private markets by early 2012, as initially envisaged under the programme. The ambitious privatisation programme that the government has now committed to will help reduce the need for additional financing, but a notable residual gap still remains to be closed through the end of 2013, when the current IMF-supported programme is due to expire. A strategy to address the financing gap has been agreed with the government and its European partners. The modalities are still being worked out, but it will likely involve a combination of voluntary private sector involvement and additional official support from euro area Member States.

In a statement on July 11, the 17 finance ministers of the Eurogroup said they recognised the need for a broader and more forward-looking policy response to assist the Greek government in its efforts to bolster debt sustainability. For its part, the IMF said it would continue to work closely with Greece and European partners to support these objectives.

Full interview