Following a decade of rapid growth with external equilibrium the Portuguese economy in the early 1970s suffered a series of major shocks. Even before the Revolution of April 1974 the increase in world petroleum prices had sharply raised the import bill and, by deepening the recession elsewhere, would soon reduce export earnings and emigrants’ remittances from abroad. The independence of the former colonies in Africa meant a loss of privileged markets and brought a major return of settlers to Portugal. Domestically, the Revolution achieved a substantial redistribution of income in favor of workers both in factories and on farms. Although the rate of economic growth slowed down, it now generated external deficits too large to be sustainable.
The problem of managing economic growth with a balance of payments constraint was new to Portugal. The authorities responded with progressively tighter austerity measures culminating in May 1978 in a stabilization program that was supported by the Fund. This program is noteworthy for its simplicity. A monthly depreciation rate was established for the escudo, together with a matching set of interest rates on bank deposits. The former was intended to make the economy competitive by reducing costs, while the latter was designed to ensure that savings would not only increase but be placed at home. As a safety measure, a limit was also imposed on domestic credit expansion, and to protect the productive sector, credit to the public sector was rationed within the total.
This approach succeeded in reconciling economic growth with external equilibrium once again, despite the changed external circumstances. An unsustainably large external deficit on current account was virtually eliminated. At the same time, the growth of the economy was maintained at a rate above the weighted average for the country’s trading partners. The reasons that made this performance possible are set out in the following sections. Section II examines the economic background in which the disequilibrium arose. Section III reviews the issues that had to be resolved in order to develop an effective program. The economic outturn is critically examined in Section IV.