Monday, January 2, 2012

European Commission report concludes progress on fiscal, economic and structural reforms in Portugal

MEMO/11/941.Brussels, 21 December 2011. European Commission report concludes progress on fiscal, economic and structural reforms in Portugal. The European Commission publishes its staff assessment following the second review of the EU and IMF-supported financial assistance programme for Portugal, carried out in Lisbon from 7 to 16 November 2011. The report concludes that, overall, Portugal has made good progress on a number of fronts, as requested by the Council of Ministers (implementing Decision 2011/344/EU). This paves the way for the third instalment of €5.3 billion in European funding to Portugal in January 2012.

Growth in 2011 is likely to be somewhat better than foreseen in the Programme. By contrast, the recession in 2012 is now projected to be more pronounced, with GDP expected to contract by 3% and risks to the outlook tilted to the downside. The economy is expected to recover, albeit at a gradual pace, in 2013.

Budget execution in 2011 has seen sizable slippages. These were, however, partly counteracted by a one-off surcharge in the personal income tax and an increase in the VAT rate on electricity and natural gas, brought forward from next year to 1 October 2011. The transfer of banks' pension funds to the state social security system will close the remaining gap for achieving the 2011 deficit target of 5.9 percent of GDP. This one-off measure will only be exceptionally used to meet the deficit target for this year and has to be seen in the context of a highly ambitious 2012 budget. This budget contains bold and credible measures of a permanent nature that rely mostly on cutting government expenditures. If implemented rigorously, the fiscal target of a deficit of 4.5% of GDP next year should be attained.

Public financial management has been strengthened through improved reporting and monitoring and reforming the budgetary framework. The government is preparing a strategy for the validation and settlement of arrears for entities inside the general government as well as for state-owned enterprises classified outside the general government. The government is committed to deep restructuring of state-owned businesses.

In the financial sector, banks are working towards meeting the higher capital requirements as required under the Programme. A legal framework to provide temporary public support to banks is under preparation. A balanced and orderly deleveraging of the banking sector remains critical, whilst safeguarding adequate credit for dynamic sectors to spur growth.

Structural reforms are a major pillar of the Programme as its success depends crucially on restoring competiveness and raising potential growth. Labour market reforms to align the protection and rights under fixed and open-ended contracts and to establish an employer-financed fund for paying out workers’ severance entitlements are advancing. The privatisation programme is being implemented under a new framework law. Reforms are also moving ahead in the housing market and the judicial system, but further progress is needed to lower entry barriers to the sheltered sectors of the economy.

The mission for the next Programme review is scheduled for February 2012.

Full staff report available on: