24 October 2012

IMF completes fifth review under an EFF arrangement with Portugal, approves €1.5 billion disbursement

The EFF arrangement, which was approved on May 20, 2011 is part of a cooperative package of financing with the European Union amounting to €78 billion over three years. It entails exceptional access to IMF resources, amounting to 2,306 per cent of Portugal’s IMF quota.

After the Board discussion, Ms Nemat Shafik, Deputy Managing Director and Acting Chair, said: “Reflecting the authorities’ strong policy efforts, fiscal and external imbalances have significantly narrowed and sovereign spreads have declined. Nonetheless, a weaker external outlook and rising unemployment have increased risks to the attainment of programme’s objectives. Additional efforts are necessary, with the support of euro area partners, to further advance fiscal consolidation and boost long-term growth. In the face of weaker revenues, the revised fiscal targets strike an appropriate balance between advancing the required fiscal adjustment and supporting growth. However, with debt now set to peak at about 124 per cent of GDP in 2014, room for manoeuvre has diminished. A prompt completion of the planned expenditure review would help rebalance the adjustment effort, which currently is predominantly based on revenue measures.“

“Structural reforms are critical to underpinning durable fiscal consolidation. Significant progress has been achieved in strengthening tax administration and public financial management, and in reforming SOEs. However, additional efforts are necessary, including by comprehensively implementing the new expenditure commitment rules, monitoring tax compliance, maintaining tight budget constraint on state-owned enterprises, and reducing costs of public-private partnerships. The authorities have a strong track record in preserving financial stability, and have taken important steps in recapitalising banks and strengthening the supervision and resolution frameworks. Exceptional support from the Eurosystem and recent ECB decisions should also prove helpful in ensuring sufficient liquidity to banks. However, risks need to be monitored carefully and access to credit by small and medium-sized enterprises should be preserved. Significant progress has been made on structural reforms, including by reducing distortions in labour, housing and product markets, as well as on judiciary reform. However, these reforms may take time to bear fruit. Alternative policy options should be considered to increase competition in the non-tradable sector, which would facilitate the external adjustment and improve long-term growth prospects.”

Press release

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