Press Release No. 12/260

Press Release: IMF Completes Fourth Review Under an EFF Arrangement with Portugal, Approves €1.48 Billion Disbursement

July 16, 2012

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Portugal’s performance under an economic program supported by a 3-year, SDR 23.742 billion (about €29.27 billion) Extended Fund Facility (EFF) arrangement. The completion of the review enables the immediate disbursement of an amount equivalent to SDR 1.197 billion (about about €1.48 billion), bringing total disbursements under the EFF arrangement to SDR 17.143 billion (about €21.13 billion).

The Executive Board also approved a request for waivers of applicability for the end-June 2012 performance criteria (PC). This waiver was necessary because the Executive Board meeting was scheduled to take place after end-June 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 percent of Portugal’s IMF quota.

After the Board discussion, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, said:

“The authorities’ strong program implementation, despite the difficult euro area environment, is commendable, and there are welcome signs of adjustment in the fiscal and external accounts. Given the daunting challenges that Portugal still faces, it will be important to maintain the commitment to strong policies and structural reforms to foster sustainable growth, especially through labor and product markets reform, to strengthen debt dynamics, and to regain market access. Sustained implementation of this agenda needs to be supported by continued progress at the European level to strengthen the currency union.

“Fiscal consolidation is on track. The end-2012 fiscal target remains within reach, although risks to its attainment have increased on account of weaker revenue performance, requiring close monitoring of developments and continued efforts to strengthen tax compliance.

“Significant progress with fiscal structural reforms has been critical in supporting consolidation efforts. The authorities have taken commendable measures to streamline the public sector and improve fiscal institutions. They should persist in their effort to reverse the continuing accumulation of arrears, particularly through swift and comprehensive implementation of the new expenditure commitment control procedures. Tight budget constraints on SOEs and continued careful management of PPPs will be particularly important in minimizing the risk of further migration of losses to sovereign balance sheets.

“The authorities have built a strong track record in preserving financial stability. Recent bank capital strengthening and the ongoing supervisory efforts to closely monitor the resilience of Portuguese banks will reinforce this track record. Ensuring an orderly deleveraging process with adequate provision of credit to viable firms remains a key pillar of the program, supporting macro-financial stability.

“Structural reforms remain critical to boost competitiveness and growth. Significant progress has been made in advancing labor market reforms. The authorities’ commitment to reform the wage bargaining process to better reflect firm-level conditions is welcome. The recent sharp rise in unemployment calls for further reforms. The announced active labor market policies will help improve employability, especially for young workers, and the deficit-neutral cut in labor taxes in the context of the 2013 budget will further support labor demand. Efforts should also focus on alleviating product market rigidities and the authorities should continue to seek ways to moderate non-tradable prices.”