Portugal to Stay Challenging Reform Course

  • Good progress in reducing macroeconomic imbalances under IMF-supported program
  • Country will have more time to implement fiscal adjustment
  • Maintaining support for reforms will be crucial as program enters more challenging phase
  • The government has made excellent progress in implementing the reforms agreed under the program supported by Portugal’s European partners and the IMF. It will now have more time to implement fiscal adjustment and continue reforming its economy, as the global economic slowdown and continued uncertainty in the eurozone makes it more difficult to rely on exports and the private sector to generate jobs and growth.

    In an interview, the IMF’s mission chief for Portugal, Abebe Aemro Selassie, discusses the prospects for economic recovery.

    IMF Survey: You have just wrapped up the fifth review under the IMF-supported program. How do you assess the discussions during this review? What is the outlook for Portugal?

    Selassie: The discussions during the fifth review revolved around how to strike the right balance between advancing the required fiscal adjustment and avoiding undue strains on the economy. Fiscal adjustment in Portugal is required to contain the high levels of debt and financing is limited. And, to the extent possible, this adjustment needs to pay heed to the evolution of output and employment. This is why we focused on trying to strike the right balance. And it was in this context and at the request of the government that the fiscal deficit targets for 2013 were revised from 3 percent to 4.5 percent of GDP, to be careful about the impact on growth of further adjustment. This decision was also partly informed by the work that IMF colleagues have been doing.

    A range of revenue and spending measures were accordingly discussed with the government meet the 4.5 percent deficit target for 2013. Subsequently of course one of those measures—a partial shift in the burden of social security contributions from employers to employees—faced a lot of resistance, and the government replaced it with an increase in personal income taxes instead. The new measures have now been factored in our assessment of the current review.

    The Portuguese government and people have made great strides in reducing economic imbalances. It has entailed a lot of sacrifice and more is still to come in the context of the 2013 budget. Good progress has been made so far, with two-thirds of the fiscal consolidation envisioned under the program to...

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