Portugal needs to ratchet up competitiveness, pursue fiscal adjustment

• Pages: 352

Page 352

Portugal has yet to emerge from the downturn that followed the bursting of the euro adoption bubble. A gradual recovery started in 2004, driven by domestic demand, but activity weakened during the latter half of the year, the IMF said in its annual economic review. High private indebtedness, weak competitiveness, and the planned significant fiscal consolidation are expected to constrain growth in the near future.

The IMF Executive Board said that in this unfavorable environment marked by large fiscal and external imbalances, slow growth, and a weak competitive position, the government must create the conditions to restart Portugal's per capita income convergence toward the euro area average as soon as possible. Toward that end, it would be crucial to pursue sustainable fiscal adjustment and measures to improve product and labor markets, enhance the business environment, and strengthen human capital development.

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The authorities' extensive use of one-off measures kept the budget deficit under the euro area's Stability and Growth Pact ceiling of 3 percent of GDP over the past few years. However, these measures did not address the underlying source of fiscal problems: the steady rise in current expenditure over the past decade. Thus, the...