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After the Executive Board discussion, Ms Nemat Shafik, Deputy Managing Director and Acting Chair, said: “Considerable progress has already been made on fiscal and external adjustment and the structural reform agenda, despite strong headwinds. Market conditions have improved significantly and Portugal has been able to return to capital markets at long maturities. Nonetheless, given the still sizeable risks to the outlook, the authorities need to sustain the reform effort to improve competitiveness, boost long-term growth, and further advance fiscal consolidation.
"The fiscal targets have been recalibrated to preserve the right balance between consolidation and support for economic growth and employment. However, scope for deviating further from the revised deficit path is limited in view of the elevated medium-term financing needs and debt ratios. Early implementation of the measures identified in the public expenditure review and continued strong implementation of the fiscal structural reform agenda remain imperative to bring public finances back to a sustainable path. The planned corporate income tax reform can also help foster investment and competitiveness, while rebalancing the adjustment mix.
“The authorities have a strong track record in preserving financial stability. Progress has been made in strengthening banks’ liquidity and capital buffers, despite a difficult operating environment. Channelling credit to viable firms to support employment and facilitate economic recovery remains an important goal. The Eurosystem has a pivotal role to play in containing credit segmentation and restoring monetary policy transmission.
"Further advances with the structural reform agenda are critical to address remaining nominal rigidities in the economy and boost competitiveness and growth. These include further actions to remove bottlenecks to growth, reduce production costs, and minimise rents in network industries. In addition to strong programme implementation, Portugal’s success continues to depend on external support and effective crisis management policies at the euro area level. The envisaged lengthening of the maturities of the EFSF and EFSM loans to support the authorities’ market re-access strategy is a welcome development in this regard.”