IMF says Greece should meet lower fiscal surplus target

WASHINGTON (Reuters) - The International Monetary Fund said on Monday that Greece’s economy would only grow by just under 1.0 percent in the long run given the constraints of its bailout program, but should meet the fiscal surplus target preferred by most IMF directors.

A Greek national flag hangs outside a shop during a rainy day at the Plaka district, in Athens, Greece, January 24, 2017. REUTERS/Alkis Konstantinidis

In its annual review of Greece’s economic policies, the IMF said most of its board directors favor a Greek fiscal surplus target of 1.5 percent of gross domestic product by 2018, while some directors favor the higher 3.5 percent target sought by Greece’s European lender group.

The Fund did not identify which directors favored the higher target or how many of its 24-member board shared that view.

The rare split among IMF’s directors reveals some divisions in their views of Greece’s fiscal performance and debt sustainability as the IMF considers whether to participate in a new bailout for Greece needed by mid-2018.

The IMF has abstained from financial involvement in Greece’s third bailout from European lenders since 2010, but remains actively engaged in negotiations on a new deal to start in mid-2018.

IMF Managing Director Christine Lagarde and other senior officials have argued that a Greek fiscal surplus target of 3.5 percent of GDP is too ambitious and massive debt relief or further austerity measures, which would hurt growth.

Germany, which contributes the most to Greece’s bailout, faces national elections in September, and is strongly against any discussion of debt relief before Greece reaches the bailout target.

The IMF review did not address whether the Fund would commit financial resources to Greece. The Fund said in a statement that the directors recognized that austerity measures and reforms have “taken a heavy toll on society that, together with high poverty and unemployment rates, has contributed to a slowdown in the reform implementation.”

“Most directors agreed that Greece does not require further fiscal consolidation at this time, given the impressive adjustment to date.”

Despite the divisions over the fiscal target, the IMF said the directors called for Greece to broaden its personal income tax base and rationalize pension spending to make room for lower tax rates and more aid to the poor.

Greece is expected to need a new tranche of aid under the current 86 billion euro ($92 billion) program by the third quarter of this year, and the head of Greece’s bailout fund said last week that a further slice of aid could only be granted once the IMF decides to formally join the program.

Germany’s Finance Minister Wolfgang Schaeuble believes that a decision by the IMF to pull out of the bailout would mean that the current program would end as well.

Reporting by David Lawder; Editing by Sandra Maler and Lisa Shumaker