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Following its third quarterly review of Portugal’s economic programme, the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF) underscored that while the programme is indeed on track, many challenges remain.
In a statement, the Troika explains that: “Policies are generally being implemented as planned, and economic adjustment is under way. In particular, the large fiscal correction in 2011 and the strong 2012 budget have bolstered the credibility of Portugal’s front-loaded fiscal consolidation strategy.”
It continues: “Financial sector reforms and deleveraging efforts are advancing, while steps are being taken to ensure that credit needs of companies with sound growth prospects are met. Reforms to increase competitiveness, growth and jobs have also progressed, although many reforms still await full implementation. The broad political and social consensus that is underpinning the programme is a key asset.”
Looking ahead, the Troika stress that the Portuguese economy will continue to face headwinds in 2012, notably as trading partner import growth is expected to weaken further, while domestic demand adjusts, and as unemployment and bankruptcies are rising. As a result, gross domestic product (GDP) in 2012 is expected to decline by 3.25%, following a fall of 1.5% in 2011. In 2013 a slow recovery should take hold, mainly supported by private investment and exports. External adjustment is proceeding.
The Troika underscores in its release that the fiscal deficit target for 2012 remains achievable.
It states that: “The deficit target of 4.5% of GDP is expected to be met with current policies, provided that downside risks to the economic outlook do not materialize.”
“To contain fiscal risks, the government needs to strengthen measures to prevent arrears accumulation and implement a strategy to settle existing arrears. The Portuguese government has also agreed an adjustment programme with the autonomous region of Madeira and will continue to reform state-owned enterprises, further strengthen tax administration and streamline public administration."
Underscoring that further progress on protecting the country’s banking system and ensuring orderly deleveraging has been made, the Troika notes that the rules for providing public capital to banks have been clarified, and plans to ensure that capital buffers of individual banks meet end-June 2012 targets are being finalized. It explains that given the recent monetary policy decisions by the ECB, banks’ liquidity constraints are expected to ease further. Furthermore, the authorities are considering a range of measures to mitigate funding strains for sound companies, the Troika adds.
Concluding its statement, the Troika emphasizes that Portugal “is making good progress toward adjusting its economic imbalances”.
It ends: “Determined implementation of reforms remains key to ensure economic recovery and fiscal sustainability. These efforts will be backed up by a strengthened EU economic policy framework. Moreover, provided the authorities persevere with the strict implementation of the programme, the euro area member states have declared they stand ready to support Portugal until market access is regained.”
Portugal’s programme is supported by loans from the European Union amounting to EUR52bn (USD69bn) and a EUR26bn arrangement under the IMF’s Extended Fund Facility.
Approval of the conclusion of this review will allow the disbursement of EUR14.9bn (EUR9.7bn by the EU, and EUR5.2bn by the IMF) These disbursements could take place in April subject to the approval of the IMF executive board, the European Union Economic and Financial Affairs Council, and the Eurogroup.
The joint mission for the next programme review is expected to take place in May 2012.
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