Journal Issue

IMF Executive Board Concludes Fifth Post-Program Monitoring with Portugal

International Monetary Fund. European Dept.
Published Date:
February 2017
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On February 17, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Fifth Post-Program Monitoring1 with Portugal.

After a sluggish first half, the economy experienced a welcome upturn in growth in the second half of 2016, boosted by stronger exports and a further decline in unemployment to pre-crisis levels. These developments point to an improved near-term outlook, but medium-term growth could be put on a more sustainable footing by reducing structural bottlenecks and high levels of corporate debt. The revised 2016 fiscal target appears likely to have been met, but prospective public outlays for banking sector recapitalization continue to weigh on public debt trends.

Executive Board Assessment2

Executive Directors welcomed Portugal’s improved macroeconomic performance in the second half of 2016, marked by a pick-up in growth, a decline in unemployment, and a fiscal outturn in line with the target. In addition, Portugal has continued to successfully access bond markets and its capacity to repay the Fund is expected to be adequate. Nonetheless, Directors noted that the public debt remains high, and the large annual financing needs, combined with banking system challenges, leave Portugal vulnerable to a range of shocks and a tightening of financing conditions. Directors, therefore, emphasized the need for a stronger momentum to improve financial sector resilience, ensure durable fiscal consolidation, and raise potential growth.

Directors welcomed the recognition by the authorities that continued efforts to improve banking sector soundness are warranted. They stressed that a comprehensive clean-up of bank balance sheets is essential to break the vicious circle between weak banks, high non-performing loans (NPLs), and low growth. This should include a predictable, time-bound, and credible plan for banks to write-off or restructure non-performing legacy assets, strengthen internal governance, and improve bank profitability, including by further cutting costs. This would help attract new private capital to support the clean-up of bank balance sheets. In this context, Directors were encouraged by the authorities’ proposals to address NPLs, including supervisory, legal, and judicial measures to incentivize banks to dispose of non-performing loans and reduce corporate debt.

Directors welcomed the authorities’ commitment to continued fiscal consolidation and noted their five-pillar strategy. They underscored the importance of a well-specified medium-term fiscal adjustment path that balances the need to put debt on a firmly downward trajectory while supporting growth. They stressed that a fiscal consolidation path that relies more on durable expenditure reform and greater spending efficiency, and less on one-off measures and capital expenditure compression, would be more sustainable and supportive of growth. They also noted the importance of strengthening the budget process.

Directors underscored that reinvigorating macro-critical structural reforms remains essential to boost the economy’s competitiveness, growth potential, and resilience to shocks. They encouraged the authorities to proceed with reforms in labor and product markets, with a particular focus on tackling labor market segmentation, improving education and skills, and enhancing public sector efficiency. They noted that it would be important to ensure that increases in the minimum wage do not impair labor competitiveness and undermine prospects for new entrants to the labor force. Removing regulatory barriers, strengthening institutional capacity, and addressing other supply bottlenecks are also considered critical reforms.

Portugal: Selected Economic Indicators(Year-on-year percent change, unless otherwise indicated)
Real GDP1.
Private consumption2.
Public consumption0.
Gross fixed capital formation4.5−
Contribution to growth (Percentage points)
Total domestic demand2.
Foreign balance−−0.1
Resource utilization
Unemployment rate (Percent)12.411.010.610.1
GDP deflator2.
Consumer prices (Harmonized index)
Money and credit (End of period, percent change)
Private sector credit−4.1−2.2−0.50.1
Broad money4.
Fiscal indicators (Percent of GDP)
General government balance−4.4−2.6−2.1−2.3
Primary government balance0.
Structural primary balance (Percent of potential GDP)
General government debt129.0130.8129.8128.7
Current account balance (Percent of GDP)0.40.3−0.6−0.7
Nominal GDP (Billions of euros)179.5184.7189.7194.6
Sources: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); Eurostat; and IMF staff projections.
Sources: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); Eurostat; and IMF staff projections.

The central objective of PPM is to provide for closer monitoring of the policies of members that have substantial Fund credit outstanding following the expiration of their arrangements. Under PPM, members undertake more frequent formal consultation with the Fund than is the case under surveillance, with a particular focus on macroeconomic and structural policies that have a bearing on external viability.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:

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