Difficult Outlook for Portugal but Program on Track

Good progress has been made on implementing agreed reforms

Outlook still difficult, with economy expected to shrink further this year

Restoring growth through improved competitiveness will be critical

It has initiated reforms to improve the functioning and fairness of the labor market—measures that will in due course help bring down the high unemployment rate and make it easier for young people in particular to find jobs—and it has started liberalizing important parts of the economy, including the telecommunications sector.

Because the government has met all of the main objectives of the program so far, the IMF’s Executive Board approved April 4 the release of about €5.17 billion under Portugal’s 3-year Extended Fund Arrangement.

Yet the outlook for the Portuguese economy remains difficult, in part because of the mild recession that has been projected for the eurozone this year. The recession is set to deepen in 2012, and unemployment will likely rise further, affecting about 14½ percent of the work force. The debt-to-GDP ratio is expected to peak at 115 percent of GDP in 2013, before starting to decline.

In an interview, the IMF’s new mission chief for Portugal, Abebe Aemro Selassie, discusses recent developments and looks at what it will take for Portugal to overcome the steep challenges ahead and restore growth and competitiveness.

IMF Survey online: Your team has just finished reviewing Portugal’s economy. Despite the difficulties, is the reform program on the right track?

Selassie: Yes, the program is on track. The reforms being pursued are an ambitious and unavoidable response to the serious economic adjustment challenges that Portugal faces. The country not only has high public and private debts but also needs to restore its external competitiveness. As a member of a monetary union, its policy choices are very constrained.

With this in mind, one has to give the government credit for implementing a difficult program pretty much as agreed.

IMF Survey online: Despite the important progress that has been made both in terms of restoring fiscal discipline and reforming the economy more broadly, financial markets still seem weary, with spreads on Portuguese debt on the high side. Why do you think that is?

Selassie: Spreads have eased a bit recently, but overall, yes, markets have been a bit sticky in their views on Portugal. Building credibility from a low base takes time and, perhaps not surprisingly, markets are not yet...