Source: U.S. Department of Commerce, Survey of Current Business August 1991, Vol. 71, No. 8, Table 11.3 53-153 092 - 10 GREECE Key Economic Indicators (Billions of Drachmas (Dr) Unless Otherwise Noted) 1/ Interest rate on long term loans to industry. 2/ Settlement basis. 3/ Greek customs data. 1991 data are embassy estimates based on January-September 1991 data. 4/ Aug 1991. Sources: Bank of Greece, National Statistical Service of Greece, Ministry of National Economy, and Embassy estimates. 1. General Policy Framework GREECE Since taking office in April 1990, the Mitsotakis Government has put into place an ambitious economic restructuring program to redirect the Greek economy away from its statist past to a modern, market oriented form. By the end of 1993, the Government aims to: slash the net Public Sector Borrowing Requirement (PSBR) to 3 percent of Gross Domestic Product (GDP) from 20 percent in 1990; cut the inflation rate to 7 percent from 23 percent at the end of 1991; and reduce the current account deficit to 3 percent of GDP from 5.4 percent in 1990. Key elements are tax reform and an extensive privatization plan. Other elements include reform of the social insurance system, investment incentives, and labor legislation. Results so far are mixed. The current account deficit will fall to between $2 and $2.5 billion for 1991 from $3.6 billion in 1990, largely because of heavy invisible inflows from the European Community (EC), rather than as a result of an underlying improvement in the merchandise trade account. Results for August hint that the recession may be biting into imports and cutting the chronic trade deficit. Net PSBR will stick at about 18 to 20 percent of GDP because of a failure to boost tax collections and realize non tax revenues from privatization and the sale of state real estate bonds. The current recession in Greece has also resulted in lower tax revenues in 1991. Financing needs keep interest rates high and continue to crowd out private borrowers. Tax evasion is widespread. A "parallel" economy 30 to 50 percent as large as the official one helps explain levels of imports and consumption that are inconsistent with published national income figures. In addition, the agricultural sector is largely exempt from taxation. A multi-rate Value Added Tax (VAT), introduced in 1987, helped partially to offset lost direct tax revenue. The Government is moving to stamp out evasion and widen the tax base. Greece's huge government deficit stems from a large public sector which has many more civil servants than an economy the size of Greece's can support. Greece's social security program is also a major drain on public spending. Finally, the state owns a number of loss-generating companies. The resulting deficits are financed primarily through treasury bills, in which banks must put 30 to 40 percent of their deposits. The Bank of Greece traditionally allocated credit by setting and earmarking reserves for the mostly state controlled banking sector. Prodded by the EC, Greece is moving to a more market-oriented credit allocation system. The Government is also encouraging private banking (domestic and foreign) and allowing state-controlled banks to operate along commercial lines. In July 1990, the Government introduced a new investment incentives law. The law redefines the types of "productive investment" that qualify for incentives. It also puts greater emphasis on tax breaks, reducing the extent of grants and subsidies of loan interest. The drachma exchange rate is managed by the Bank of Greece (BOG), which daily sets the "Fixing Rate" in a meeting with banks operating in Greece. Since a 1985 devaluation, the exchange rate has not fully compensated for the inflation differential between Greece and its main trading partners. The BOG has used exchange rate policy as an anti-inflation tool. This, and sharply rising unit labor costs, have contributed to a large trade imbalance, as imports have been sucked in and exports flattened. Over 1991, this Government has tried to speed up the rate of depreciation. The drachma has fallen 19 percent against the dollar since the beginning of the year. The aim is to put the drachma into the EC Exchange Rate Mechanism by the end of 1993. Foreign exchange controls have been progressively relaxed since 1985. Following EC directives, Greece has liberalized capital inflows and outflows for EC residents. It has also eased restrictions on third country investors (see Section 5). There is free capital movement for investments in stocks and government bonds. Free repatriation of original capital investment is also now allowed. Greek residents may now purchase realistic amounts of foreign exchange for travel to EC countries (but there are still restrictions for travel to non-EC countries; see Section 5). As of May 1991, Greeks may freely invest in real property and securities in other EC member states, but investments in non-EC countries are still restricted. All transactions remain subject to Bank of Greece surveillance to prevent abuse. 3. Structural Policies Tight and extensive retail price controls have been relaxed under the Mitsotakis Government. However, about one quarter of the goods and services included in the Consumer Price Index are produced by state-controlled companies, and the Government retains considerable indirect control. Remaining price controls and subsidies, e.g., public transport prices, distort the economy, but are not selective barriers to U.S. exports. The tax system blends taxes on corporate profits and personal incomes, value added tax (VAT) on goods and services, real estate taxes, a variety of stamp duties, and special consumption taxes, e.g., on automobiles and petrol. Distributed dividends are subject to withholding of 42 to 50 percent. Tax rates on undistributed profits range from 35 to 46 percent but from July 1990, 30 to 50 percent of undistributed profits earned in 1990 through 1993 and used for "productive investments" are exempt from taxation. The top personal income tax rate remains at 50 percent. The VAT is eight percent for essentials, 18 percent for most goods, and 36 percent for luxury goods. A four percent rate applies to periodicals and books. There is no discrimination against foreign or U.S. products. The 36 percent rate (which covers about four percent of goods and GREECE services) may soon be abolished. "Special consumption taxes" are levied on various domestic and imported luxury goods, such as jewelry, electronic equipment, and automobiles. The Government encourages "productive investment" which aids economic development through export expansion, import substitution, technology transfer, or job creation. However, while Government policy is to encourage foreign investment, complex regulations and excessive bureaucracy often discourage U.S. and other foreign investors. So, too, do regulations which strictly limit the ability of a company to lay-off workers. Greece's privatization program has had few practical results so far. The 1991 budget included 250 billion drachmas ($1.35 billion) of revenues from the sale of state companies, but less than 50 billion were collected. Various factors have caused delays: legal problems arising from claims of previous shareholders, settlement of debts and opposition from unions, the opposition and within the Government and the new Democracy Party. A bill to speed up privatization passed Parliament on December 13, 1991. The new law establishes a Ministerial De-Nationalization Committee (MDC) as the central authority for de-nationalization, lays out a timetable for bureaucratic deliberation, and standardizes procedures. The law is intended to end the delays experienced so far. The MDC's authority to intervene and dictate solutions should help to expedite procedures. But several problems remain. For example, the law does not specify how state-owned companies' large debts, most of which are owed to state banks, will be settled. Nor does it say what happens if no potential buyer's offer for a company meets the officially set minimum price. 4. External Debt Management Policies Total foreign debt at the end of 1990 was about 28 billion dollars. The Bank of Greece estimates external public debt was $21.93 billion and external private debt, 3 billion. Greece also owes about $3 billion on U.S. Foreign Military Sales loans. Debt servicing was equal to 65 percent of exports and 6.3 percent of GDP. With no new net borrowing, Greece's external debt service will probably exceed $4.2 billion per year in 1991 through 1993, and total about $21 billion from 1991 through 1995. About two-thirds of the external debt is denominated in currencies other than the dollar. Net borrowing was $1.1 billion in 1990. The credit rating of Greece, as a member of the European Community, remains sound. It has regularly serviced its debts and has generally good relations with commercial banks and international financial institutions. It has not had an adjustment program with the IMF or the World Bank. In 1985, and again in 1991, Greece borrowed from the EC If the external debt load becomes more onerous, it might limit Greece's ability to buy U.S. products, including big ticket and military items, on credit. |