Portugal: Recovery on Track but Higher Growth Needed

  • Portugal’s recovery is on track and unemployment is back to precrisis levels
  • Yet public and private debt is high, limiting fiscal room and constraining growth
  • Structural reforms to remove growth bottlenecks need to continue
  • This recovery was enabled by Portugal’s successful three-year adjustment program supported by the European Commission, the European Central Bank, and the IMF. The third post-program monitoring (PPM) report, published today, acknowledges the progress made by Portugal in recent years, but also points out areas to focus on to raise the economy’s growth potential. IMF Survey discussed the findings of the report with Subir Lall, the mission chief for Portugal.

    IMF Survey: Portugal’s economy is in its fourth year of recovery and the country enjoys market access on favorable terms. Its unemployment rate has also significantly declined. Yet there are signs that the recovery is losing steam.

    Lall: Based on our most recent projections, we think that the economy is gradually easing to its medium-term growth rate of about 1.2 percent. In part, this is because the positive impact of generally favorable global conditions tends to decline over time. In addition, the role of consumption—the main driver of this recovery—will also diminish over the medium term. The growth of the disposable household income is constrained by taxes, which are in turn necessary to support the authorities’ overall fiscal policy objectives. Therefore a further reduction of household savings allows for only limited additional consumption growth. Private sector investment remains constrained by the high level of corporate debt, despite a recent pick-up.

    IMF Survey: The PPM report notes concerns over the health of the Portuguese banking sector. What is the main problem with this sector?

    Lall: Since the end of the crisis, Portuguese banks have remained burdened by a large stock of legacy assets, some of which are of weak quality. This constrains banks’ ability to provide financing to new and highly productive sectors of the economy, which would be the future drivers of growth and employment. Instead, significant economic resources remain tied up in low-productivity firms. Banks need to move expeditiously to adapt to the new environment, which is markedly different from the precrisis normal. Before the crisis, banks profitably channeled large capital inflows into the Portuguese economy. In the new environment...

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