IMF issues warning to Portugal after austerity policy rollbacks

23 Sep 16

Anti-austerity policy reversals in Portugal are starting to rewind the country’s fragile economic recovery, according to the International Monetary Fund.


Portugal's parliament

The IMF has warned Portugal's government that anti-austerity policies are dragging on the country's economic recovery.


The IMF warned Portugal that backtracking on its austerity programme has undermined investor confidence and certainty, causing the recovery to lose momentum. It cut its 2016 growth forecasts from 1.4% to 1.0%.

The country’s prime minister, António Costa, has vowed to “turn the page” on austerity. He has increased the minimum wage, reinstated cancelled public holidays, cut back increased hours for civil servants and restored cuts in public sector wages.

The fund said these “recent reversals have generated uncertainty that appears to be a significant factor behind the slowdown in investment”.

The policy rollbacks also suggest Portugal will end the year with a deficit of close to 3% GDP, rather than the 2.5% required by the country’s European Union partners.

The European Commission had threatened to fine Portugal earlier this year for its failure to reduce its deficit in line with EU budget rules. The EU requires Portugal to reduce its deficit from 4.4% of GDP in 2015 to below 3%.

The fund warned Portugal it will need to undertake a “credible and realistic” fiscal adjustment to put the public finances back on track. The IMF’s executive board said this should focus largely on expenditure.

They called for a “comprehensive” spending review aimed in particular at improved means-testing of social benefits and controlling public sector pensions and wages. Tax policy should also be more “stable and predictable”, they added.

While the government is also targeting a reduction of the deficit by 2020, the fund said this relies too much on efficiency savings.

The fund also issued a warning over Portugal’s high level of public debt, estimated to be 128.5% of GDP this year, as well as a substantial corporate debt overhang.

Along with weaknesses in the banking system, this all leaves the economy at a “challenging juncture”, and Portugal “uniquely vulnerable” to shifts in market sentiment and even small shocks, it said. 

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