IMF Executive Board Concludes 2024 Article IV Consultation with Portugal

IMF News, October 2, 2024

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The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Portugal.
Portugal recovered strongly from the successive shocks that hit the global economy since the pandemic.
Growth in 2023 continued to exceed the euro area average, driven by strong private consumption, net exports, and investment supported by EU funds.
Labor force participation increased and net positive migration led to higher hours worked while unemployment remains at historically low levels.
Inflation has decelerated fast.
A large fiscal surplus was achieved in 2023, and public debt was reduced to 99 percent of GDP—a reduction of 36 percentage points of GDP since 2020.
The external position strengthened, supported by vigorous exports including tourism, EU funds, and improved terms of trade.
Financial stability indicators improved, reflecting a reduction in systemic risks.
Near-term outlook: growth is projected to remain robust and inflation is projected to decelerate further.
Medium-term constraints: low productivity growth, population aging, and subdued investment.

Directors commended Portugal’s remarkable recovery, with economic growth exceeding its pre‑Covid trend and euro area growth, and noted the impressive reduction in public debt.
Persistent structural challenges include demographic pressures, insufficient investment, and subdued productivity that constrain potential growth.
Directors encouraged:
- Maintaining prudent fiscal policy.
- Closely monitoring risks in the financial sector.
- Promoting greater productivity and the green transition, including continued leveraging of EU funds.
Directors viewed targeted small fiscal surpluses, combined with the ECB’s gradual monetary policy loosening, as appropriate to achieve a soft landing.
A neutral fiscal stance over the medium term would further reduce debt and rebuild fiscal buffers.
Careful calibration of new tax cuts and spending increases, complemented as needed by offsetting measures, will be important.
A comprehensive tax reform to simplify the tax system and reduce tax expenditure could generate significant fiscal space for higher public investment.
Importance of improving spending efficiency and addressing aging‑related spending pressures was underscored.

Directors welcomed the decline of systemic financial risks, while calling for continued vigilance, particularly regarding risks stemming from the real estate sector.
Authorities are encouraged to stand ready to recalibrate macroprudential tools as needed.
As high interest rates strained borrowers’ repayment capacity:
- Directors welcomed the introduction of a sectoral systemic risk buffer for household loans secured by residential properties.
- Directors encouraged the authorities to consider introducing a positive neutral countercyclical capital buffer to further strengthen financial stability in potential downturns.
Further improvements to the AML/CFT framework will be critical to safeguard the integrity of the financial system.

Reforms needed to increase productivity and promote faster income convergence with the euro area include:
- Product market reforms, including streamlining regulations at all levels of government.
- Reforms for a more flexible labor market.
- Digitalization and upskilling the labor force.
Directors appreciated the authorities’ ambitious targets for the green transition, which could be achieved by:
- Continued progress toward carbon tax adjustments.
- Further reducing fuel subsidies.
- The planned broadening of the EU emission trading system coverage.

Real GDP (percent, year-over-year):
- 2022: 6.8
- 2023: 2.3
- 2024: 1.9
Private consumption (percent, year-over-year):
- 2022: 5.6
- 2023: 1.6
- 2024: 1.7
Public consumption (percent, year-over-year):
- 2022: 1.4
- 2023: 1.0
- 2024: 2.1
Gross fixed investment (percent, year-over-year):
- 2022: 3.0
- 2023: 2.6
- 2024: 3.5
Exports (percent, year-over-year):
- 2022: 17.4
- 2023: 4.1
- 2024: 2.8
Imports (percent, year-over-year):
- 2022: 11.1
- 2023: 2.2
- 2024: 3.3
Contribution to Growth — Total domestic demand:
- 2022: 4.5
Contribution to Growth — Foreign balance:
- 2022: 0.9
- 2023: -0.2
Resource utilization — Employment / Unemployment rate (percent, average):
- 2022: 6.2
- 2023: 6.6
- 2024: 6.5
Prices:
- GDP deflator:
- 2022: 5.0
- 2023: 7.1
- Consumer prices (HICP):
- 2022: 8.1
- 2023: 5.3
- 2024: 2.5
Fiscal indicators (percent of GDP):
- General government balance:
- 2022: -0.3
- 2023: 1.2
- 2024: 0.2
- Primary government balance:
- 2022: 1.5
- 2023: 3.1
- General government debt:
- 2022: 112.4
- 2023: 99.1
- 2024: 94.4
Current account balance:
- 2022: -1.1
- 2023: 2.0
Nominal GDP (billions of Euros):
- 2022: 242.3
- 2023: 265.5
- 2024: 278.1

Press Release No. 24/353 — IMF Executive Board Concludes 2024 Article IV Consultation with Portugal.