Public Information Notice: IMF Concludes 2001 Article IV Consultation with Portugal

April 26, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2001 Article IV Consultation with Portugal is also available.

On March 25, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Portugal.1


After an extended period of real convergence in living standards toward the euro-area average, the Portuguese economy weakened markedly in 2001. GDP growth in 2001 is estimated at around 1.6 percent, about half the rate recorded over the previous two years. The growth slowdown reflected to some extent the waning effect of euro-entry-related declines in interest rates and private sector responses to rising indebtedness levels. With external demand also weakening, exports stalled in the third quarter of 2001. The external current deficit narrowed moderately, but it remained (in relation to GDP) among the highest for advanced economies.

Inflation has continued to exceed the euro-area average, reflecting to an important extent relatively strong cost pressures in Portugal. With low unemployment, wage increases (including in the public sector) have remained well above increases in the euro area, and the differential has not been compensated by higher productivity growth. This has left core consumer price inflation (that is, headline inflation, excluding energy and unprocessed food) some 1½ percentage points above the area average.

In the financial sector, credit growth has moderated, but continues to exceed nominal income growth by a wide margin. As a result, private sector indebtedness levels have risen further, and bank credit (in relation to GDP) is well above the euro-area average. The credit boom has outstripped the growth in core deposits, and banks have financed themselves extensively on international capital markets.

Considerable uncertainty surrounds the fiscal outturn for 2001. All estimates indicate, however, that the fiscal deficit widened appreciably and the original target was missed by a substantial margin, reflecting higher-than-budgeted expenditures as well as lower revenues. Overall, the authorities expect a fiscal deficit of 2.2 percent of GDP (twice the original target), while staff sees additional risks that would further increase the deficit. For 2002, the budget aims at lowering the deficit by 0.4 percentage points to 1.8 percent of GDP. Notwithstanding the fiscal slippage in 2001, the updated Stability Program reconfirms Portugal's commitment to achieve a balanced budget (in structural terms, that is, net of the impact of the business cycle) by 2004.

The near-term economic outlook is subject to unusual risks. In part, these relate to external market prospects, particularly as concerns the timing and strength of the recovery in partner countries. In addition, economic growth will depend on the domestic economy's response to sizable macroeconomic imbalances, which are likely to require a redirection of resources from domestic uses toward exports. In all, staff expects GDP growth of somewhat below 1 percent in 2002 (versus 1.75 percent growth envisaged in the Stability Program).

Executive Board Assessment

Executive Directors noted that economic activity had slowed markedly in Portugal, after an extended period of growth above the euro-area average that had contributed to one of the area's lowest unemployment rates. The growth slowdown reflected the global weakening of activity but also domestic factors, and has taken place against the background of sizable macroeconomic imbalances, including a large external current account deficit, rapidly increasing household and enterprise indebtedness, and a marked widening of the fiscal deficit in 2001.

Directors called on the incoming government to take decisive, early steps to unwind the macroeconomic imbalances and recommence the convergence in Portugal's living standards toward the euro-area average. Wage moderation could facilitate the needed shift in resources, improving cost competitiveness and raising export growth.

Directors considered the strengthening of fiscal policy as central to improved macroeconomic performance. In light of the large fiscal deficit slippage in 2001, which reflected in part current expenditure overruns, improvements are needed in expenditure monitoring and control, so that ad hoc expenditure cuts during the course of a fiscal year could be avoided. Directors cautioned against reducing taxes until sufficient expenditure cuts have been implemented to secure the required reduction in the fiscal deficit. Noting the lower-than-budgeted revenue outturn in 2001, Directors called for strengthening tax administration and also for more realistic revenue projections.

Directors considered the Stability Program's objective of achieving structural budget balance by 2004 as appropriate. They also noted that a rise in public saving would facilitate a reduction of the external current account deficit and contain credit growth. For 2002, Directors called for cautious budget implementation, especially in the early part of the year, given the uncertainty surrounding the sustainability of expenditure cuts implemented in the latter part of 2001, and the larger-than-expected projected 2001 deficit, which, if confirmed, would call for fiscal consolidation to be accelerated in 2002.

Directors considered public expenditure restraint as critical for securing durable fiscal consolidation. They welcomed the fact that the Stability Program targets nominal expenditure growth well below projected GDP growth. Nevertheless, Directors argued for more decisive expenditure containment in 2002, especially for the public sector wage bill. Directors also urged consideration of measures to stem future increases in payments for pensions and health costs, a review of public expenditure commitments incurred outside the annual budget, and an examination of the impact on the fiscal position of local government spending. They advised the authorities to undertake a fiscal module of a Report on the Observance of Standards and Codes.

With respect to the financial sector, Directors noted that the banking sector appears to be adequately provisioned and profitable. At the same time, private sector credit growth continues to exceed nominal income growth by a wide margin. Directors cautioned that, in the event of a prolonged economic downturn, credit concentration in housing and infrastructure could entail larger risks than observed historically. Directors also observed that credit growth has far outstripped the growth in core bank deposits, with banks securing additional financing needs on international capital markets, which could expose the financial sector to potential liquidity risks.

Directors noted that supervisory coordination has been strengthened considerably. In view of potential financial sector risks related to Portugal's macroeconomic imbalances, Directors considered that supervisory guidance on increasing equity capital, where warranted by potential risks, was well placed. They welcomed the authorities' intention to review financial sector issues in the context of a Financial Sector Assessment Program in late 2002. They also welcomed Portugal's adoption of the OECD anti-bribery convention, and its commitment to strengthen measures against money laundering and the financing of terrorism.

Directors considered that Portugal's medium-term growth prospects depend on raising productivity growth. This would require further progress on structural reform, which would also facilitate the unwinding of present macroeconomic imbalances. Directors called for policy initiatives to strengthen competition, and to reduce the relatively high dismissal costs in the labor market. While the latter may have contributed to a low unemployment rate, they may hinder labor market efficiency and flexibility, with adverse implications for productivity.

Directors encouraged the authorities to fully liberalize imports from the least developed countries and to raise the level of Portugal's official development assistance to the UN target.

Directors encouraged the authorities to strengthen the statistical weaknesses, notably in the fiscal and real sectors, that complicate the assessment of economic conditions and policymaking.

Portugal: Selected Economic Indicators






2002 1/

Real economy (change in percent)


Real GDP






Domestic demand






CPI (year average, harmonized index)






Unemployment rate (in percent)






Gross national saving (percent of GDP)






Gross domestic investment (percent of GDP)







Public finance (percent of GDP)


General government balance 2/






Primary balance 2/






Public debt







Money and credit (end-period, percent change)


Total domestic credit






National contribution to euro area M3







Interest rate (end-period)


Deposit rate, 91-180 days






Ten-year government bond yield







Balance of payments (percent of GDP)


Trade balance






Current account (including capital transfers)






Net official reserves (in US$ billions, end of period)







Exchange rate regime

Euro area member


Present rate (February 28, 2002)

US$0.87 per euro


Nominal effective rate (1995 = 100)






Real effective rate (1995 = 100)







Sources: Bank of Portugal; Ministry of Finance; and IMF staff estimates and projections.


1/ Staff projections.

2/ Fiscal balance figures are based on data that reflect Portugal's derogation on recording taxes and social security contributions under ESA 95 rules. EUROSTAT reports that the changeover to these rules, to take place in mid-2002, would add, for example, an estimated 0.4 percent of GDP to the 2001 general government deficit.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the March 25, 2002 Executive Board discussion based on the staff report.


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