Abstract
Portugal achieved progress in containing the fiscal deficit, strengthening financial sector resilience, and structural reforms. Executive Directors commended the efforts to contain the fiscal deficit in line with the requirements of the Stability and Growth Pact. They encouraged the authorities to implement the recommendations of the fiscal Report on the Observance of Standards and Codes (ROSC) and to move toward comprehensive multiyear budget targets. They underscored that a sustainable economic recovery hinges on strengthening competitiveness and on coping with the effects of euro appreciation.
1. This supplement to the staff report for the 2003 Article IV consultation with Portugal (2/19/04) provides an update on recent developments. The new information does not change the report’s staff appraisal.
2. Real GDP is estimated to have declined by 1.3 percent in 2003. The National Institute of Statistics (INE) raised its estimates of GDP growth for both 2001 and 2002 by 0.1 percentage point, to 1.8 percent and 0.5 percent, respectively. For 2003, INE estimates that real GDP declined by 1.3 percent—about ¼ percentage points below the estimate provided in the staff report, reflecting somewhat larger-than-expected declines in capital spending and public consumption. Confidence and high-frequency activity indicators have shown little upward momentum in early 2004, pointing to additional downside risks to the staff’s 1 percent GDP growth forecast for 2004.
3. Preliminary estimates indicate an external current account deficit (including capital transfers) of 3 percent of GDP in 2003, after 5.1 percent in 2002. Estimates for 2003 and 2002 are ¼ and ½ percentage points, respectively, below those reported in the staff report. Considerably smaller income account deficits, which were only partly offset by lower-than-expected private sector remittances, were the main reason for the revisions.
4. The authorities’ revised estimate of the general government deficit is 2.8 percent of GDP in 2003 (versus the staff report estimate of 2.9 percent). Relative to the staff’s previous estimate, the deficit revisions reflect partly offsetting effects of several factors: (i) higher tax and social security revenues; (ii) lower capital revenues; and (iii) lower expenditures, including on public sector wages and capital. INE has also provided fiscal accounts revisions for some earlier years, most significantly raising the 2001 deficit estimate from 4.2 percent to 4.4 percent of GDP. In the staff’s view, the revisions of the 2003 estimates—especially higher-than-expected tax revenues, but also lower expenditures—will have positive carry-over effects into 2004. In all, staff expects now a general government deficit of 4.1 percent of GDP for 2004 (versus the staff report estimate of 4.7 percent); absent further measures, this would still be well above the budget target of 2.8 percent of GDP.
5. Public sector wage moderation will continue in 2004, and the government has also announced ambitious revenue targets for privatization. Public administration wages above about €1,000 per month will be frozen, as in 2003, while lower wages will rise by 2 percent in 2004. The government has also announced plans to raise privatization revenues of about €2.5 billion over the coming year.