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The completion of the review enables the immediate disbursement of an amount equivalent to SDR 1.679 billion (ca. €1.91 billion), bringing total disbursements under the EFF arrangement to SDR 21.379 billion (ca. €24.34 billion).
The Executive Board also approved a request for waivers of applicability for the end-September 2013 performance criteria (PC). This waiver was necessary because the Executive Board meeting was scheduled to take place after end-September but prior to the availability of data to assess the relevant PCs.
The EFF arrangement, which was approved on May 20 2011 (see Press Release No. 11/190), 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: “Portugal’s short-term outlook has improved and unemployment has started to decline. Considerable progress has been made in advancing fiscal and external adjustment and structural reforms. Decisive steps were taken to keep the programme on track following recent setbacks and legal challenges. Nonetheless, there remain implementation risks and uncertainty surrounding macro-economic prospects and market financing. Continued strong commitment to the programme and political cohesion are therefore critical to strengthen the recovery and regain full market access.
“In light of still fragile debt prospects, tighter financing conditions, and a sizeable adjustment ahead, it will be important to sustain the fiscal consolidation effort. Full implementation of the 2014 budget and the underpinning expenditure reforms is particularly critical. The government is committed to taking alternative measures should key planned reforms be ruled unconstitutional. At the same time, further efforts are needed to address underlying weaknesses in public finances, including a large public sector with relatively high wages and pensions. The planned fiscal reforms aim to control expenditure and domestic arrears, restructure state-owned enterprises, and strengthen tax compliance.
“The authorities have a strong record in preserving financial stability, and banks’ liquidity and capital conditions remain adequate. Given the challenging economic environment, ongoing initiatives to improve supervision and monitor risks are welcome, including a further strengthening of banks’ quarterly stress tests. Channelling credit to viable firms is key to support the recovery and employment. In this context, there is a need to step up restructuring efforts to address the corporate debt overhang.
“Forceful implementation of the ambitious reform agenda is critical to boost competitiveness, jobs and long-term growth. This includes further advances to address the remaining nominal rigidities and supply-side bottlenecks.
“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, including support by the Eurosystem to help address financial segmentation and restore an appropriate monetary policy transmission.”
Eighth and Ninth Reviews Under the Extended Arrangement and Request for Waivers of Applicability of End-September Performance Criteria
Discussions for the combined eighth and ninth reviews were delayed by a political crisis and marked by new adverse Constitutional Court rulings. Reflecting in part austerity and reform fatigue, tensions within the ruling coalition led to two prominent cabinet members tendering their resignations. The crisis triggered a government reshuffling, but uncertainty was compounded by concerns about the predictability of policymaking following new unfavorable Court rulings against an important public expenditure reform as well as steps to soften strict employment protection rules. These developments led to elevated sovereign yields, delaying the government’s plans to follow up on successful bond issues earlier this year. The near-term economic outlook has nevertheless improved somewhat, and progress has been made toward the program objectives.
Recent economic data signal that the economy may have bottomed out. Remedial actions were taken to address delays in reforms due to the reorganization of the government. All end-June performance criteria and all but one structural benchmarks underpinning the review have been met. Programme review discussions focused on measures needed to keep the programme on track. It was agreed that, in view of the now narrow path to full market access, adhering to the programme strategy was critical to signal commitment to reforms and boost confidence.
The fiscal targets were reaffirmed and fiscal measures were identified to underpin the targeted adjustment. Discussions also focused on steps to strengthen supervision in view of the still challenging conditions facing banks and on the structural agenda to boost competitiveness and growth. Nonetheless, implementation risks are high, and political cohesion remains critical. Renewed tensions within the government need to be avoided, as they would delay the recovery and increase downside risks to the programme. There is also a risk that new Constitutional Court rulings will further complicate policy-making and heighten economic uncertainty. Decisive policy responses in case this risk materialises will be essential since the room for maneeuvre under the programme has become limited.
Staff supports the authorities’ request for completion of the combined eighth and ninth reviews and for waivers of applicability of the end-September PCs. The purchase released upon completion of this review would be in an amount equivalent to SDR 1679 million.
Press release, 13.11.13
Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, 24.10.13