By Nick Mann | 29 February 2012

Portugal moved a step closer to receiving its next tranche of bailout funding yesterday, after the European Commission, European Central Bank and International Monetary Fund said its deficit reduction programme was ‘on track’.

In a statement issued after a review of Portugal’s economic programme carried out last week, the ‘troika’ said policies were ‘generally’ being implemented as planned and economic adjustment was under way.

‘In particular, the large fiscal correction in 2011 and the strong 2012 Budget have bolstered the credibility of Portugal’s front-loaded fiscal consolidation strategy,’ they said. Portugal’s target of reducing its deficit to 4.5% of gross domestic product is ‘within reach’ with current policies.

This endorsement paves the way for Portugal to receive a further €14.9bn in bailout funds - €9.7bn from the European Union and around €5.2bn from the IMF. According to the troika, this money could be made available in April, subject to approval by the IMF executive board and EU finance ministers.

However, they also said the Portuguese economy would continue to face ‘headwinds’. In particular, demand from Portugal’s trading partners is expected to weaken this year, while domestically unemployment and bankruptcies are rising.

Portugal’s GDP is expected to fall by 3.4% this year – following a 1.5% fall in 2011, but a ‘slow’ recovery is then expected next year, mainly supported by private investment and exports.

European Commission vice president Olli Rehn welcomed the conclusions of the review and hailed the progress being made by the Portuguese government in addressing ‘long-standing weaknesses’ in the public sector.

‘I count on the commitment of the Portuguese authorities to continue to address the remaining challenges with determination and step up efforts where necessary,’ he said.

He added: ‘This is an ambitious, but realistic, programme. The broad political support it enjoys remains a key asset for its success. I fully recognise that the inevitable economic adjustment and the ongoing reforms involve courage and sacrifices from the Portuguese people. At the same time, the programme pays particular attention to protecting the most vulnerable in society. ‘