Press Release No. 12/397

Press Release: IMF Completes Fifth Review Under an EFF Arrangement with Portugal, Approves €1.5 Billion Disbursement

October 24, 2012

The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Portugal’s performance under an economic program supported by a 3-year, SDR 23.742 billion (about €28.2 billion) Extended Fund Facility (EFF) arrangement. The completion of the review enables the immediate disbursement of an amount equivalent to SDR 1.259 billion (about about €1.5 billion), bringing total disbursements under the EFF arrangement to SDR 18.402 billion (about €21.8 billion).

The Executive Board also approved a request for waivers of applicability and nonobservance of the end-September 2012 performance criteria.

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:

“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 program’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 percent of GDP in 2014, room for maneuver 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 recapitalizing 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 labor, 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.”