The book, From Crisis to Convergence – Charting a Course for Portugal, was written by the IMF’s Portugal team and published on June 28. IMF Survey discussed the book’s findings with Subir Lall, the Mission Chief for Portugal.
IMF Survey : What would you say were the most significant achievements of the stabilization program?
Lall: The program succeeded putting the economy on sound footing and restoring market access. Portugal transformed itself from a perennially large net external borrower into a net lender, with the current account rapidly turning positive for the first time in decades. With credibility restored and the recovery taking hold, the country has been able to obtain financing from markets at comfortable yields.
At the same time, many of the other underlying imbalances that had been built up over many years could not be unwound quickly. Low competitiveness and its twin, low household savings, have been longstanding challenges highlighted repeatedly in our reports. While substantial efforts were made to improve competitiveness, more needs to be done.
In addition, even though many reforms were legislated, implementation has lagged. As a result, unemployment is still higher than it should be, especially among the elderly and the young, and the corporate sector remains deeply indebted, exerting a drag on investment and growth. Looking forward, Portugal’s main challenge is to maintain the hard-won external balance while moving toward an internal balance, that is, full employment and high sustained growth.
IMF Survey : In retrospect, what could have been done differently: the design of the program, or the demanded measures and targets?
Lall: The program began in 2011 at a time of great uncertainty, with the very viability of the euro questioned. The team had to continuously adjust course with the rapidly evolving situation both in Portugal and abroad. For example, the deepening euro area crisis early in the program and the drying out of private capital flows resulted in a much more pronounced output contraction than originally anticipated.
As a result, the fiscal targets were relaxed to minimize the impact on an already weak economy, once limited market financing became available. Some have argued that the program’s fiscal consolidation had a lot to do with the sharp...