IMF Reaches Staff-Level Agreement With Portugal On a €26 Billion Extended Fund Facility ArrangementPress Release No. 11/160
May 5, 2011
Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued the following statement today on Portugal:
“The Portuguese authorities have put forward a bold, multi-year reform program aimed at overcoming the country’s economic challenges. Above all, it aims to boost growth and employment.
“The program is based on a three-prong strategy: restoring competitiveness, ensuring a balanced fiscal path, and stabilizing the financial sector.
“The first priority is to tackle the longstanding and deep-rooted structural problems that have caused Portugal to have the lowest rate of growth in the Euro Area over the last decade, and sent unemployment to its highest level in ten years. To address these problems, it is essential to foster productivity and competition.
“Achieving this goal means reducing public sector involvement in the economy and addressing the issue of rent-seeking behavior and excessive profits in the non-tradable sector. Specific measures include cutting subsidies in the electricity sector, enabling easier entry in the telecommunications market, and reducing the number of regulated professions.
“Competitiveness would also be boosted by a potentially game-changing “fiscal devaluation” involving plans for a major reduction in social security contributions (offset by other appropriate tax and expenditure adjustments), thus significantly reducing labor costs. In addition, the program has a major focus on making the labor market function better so that workers can move more smoothly to expanding areas of the economy. And it addresses the “dual contract” system that inhibits employment opportunity, not least for the young.
“The program’s second priority is to strengthen fiscal policy. A carefully balanced mix of measures— amounting to about 10 percent of GDP, including those in the 2011 budget—will reduce the budget deficit to 3 percent of GDP by 2013, and stabilize public sector debt. These measures will be supported by improving fiscal policy implementation. This fiscal path reflects a trade-off between the need for concrete, front-loaded actions to restore market confidence, while allowing time for reforms to rekindle growth.
“On the expenditure side, measures include reducing public subsidies and transfers, and better prioritizing capital spending. On the revenue side, the strategy focuses on shifting the composition of taxation toward indirect and property taxes, broadening the income tax base—making it fairer and more equitable.
“The program’s third priority is to ensure the stability of the financial sector. Measures include increasing banks’ capital positions, strengthening regulation and supervision, and introducing a new solvency support mechanism—fully financed under the program—that can be used as needed.
“In addition, the authorities accord high priority to safeguarding the social safety net. Reductions in public wages and pensions will exempt those in the lower categories. Assistance to the most vulnerable will be protected through better prioritization and means testing. The substantial financial support being provided by the international community will also help to minimize social costs.
“The financing package of €78 billion (about US$116 billion) is designed to allow Portugal some breathing space from borrowing in the markets while it demonstrates implementation of the policy steps needed to get the economy back on track.
“Of this total amount, the European Union has pledged €52 billion (about US$78 billion). The IMF’s contribution would be through a three-year SDR24 billion (about €26 billion; or US$39 billion) loan, representing about 2,300 percent of Portugal’s quota under the Extended Fund Facility (EFF). The IMF has activated its fast-track procedures for consideration of this EFF, and I expect the arrangement would go to the Executive Board for approval before the end of the month.
“This is an ambitious program that will involve sacrifice from the Portuguese people. But with a national effort, it will lead to a stronger, more dynamic economy able to generate growth, jobs, and opportunity. The program has broad cross-party support which is key to its success, as is sustained implementation. The IMF, together with our European partners, is committed to support this effort.”