By Nick Mann | 17 July 2012
The International Monetary Fund has released its latest slice of bailout funds for Portugal but warned that the country risks missing its fiscal targets and faces ‘daunting’ economic challenges.
The €1.48bn loan was approved by the fund’s executive board yesterday. It takes the total amount the IMF has lent to Portugal since May 2011 to €21.13bn. Together, the IMF and European Union are making €78bn in bailout funds available over a three-year period to help rescue the country’s ailing economy.
Nemat Shafik, deputy managing director of the IMF and acting chair of the board, commended the Portuguese government’s strong implementation of its austerity programme and highlighted ‘welcome signs’ of adjustment in its fiscal and external accounts.
‘Given the daunting challenges that Portugal still faces, it will be important to maintain the commitment to strong policies and structural reforms to foster sustainable growth, especially through labour and product markets reform, to strengthen debt dynamics, and to regain market access,’ she said.
‘Sustained implementation of this agenda needs to be supported by continued progress at the European level to strengthen the currency union.’
Portugal’s fiscal consolidation is on track, she said, but the risk of it failing to reach its targets for the end of the year has increased as a result of weakening revenues. The government should closely monitor developments and continue efforts to ensure people pay their taxes.
Shafik welcomed the ‘significant progress’ that had been made with fiscal structural reforms, which had been critical in supporting consolidation efforts. ‘The authorities have taken commendable measures to streamline the public sector and improve fiscal institutions,’ she said.
‘They should persist in their effort to reverse the continuing accumulation of arrears, particularly through swift and comprehensive implementation of the new expenditure commitment control procedures.’
In particular, Portugal must ensure there are tight budget constraints on its state-owned enterprises and continue to carefully manage public-private partnerships to minimise the risk of any loses they make ending up on the government balance sheet.
Shafik also highlighted the importance of further labour reforms to counter a recent sharp rise in unemployment. Planned cuts in labour taxes will help to support labour demand, as will recently announced ‘active’ labour market policies.
