Portugal: Completing the Job
IMF Blog, February 19, 2014
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- Portugal: Completing the Job
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Bibliographic details
- Authors: Subir Lall
- Published: February 19, 2014
Assessment and progress
- IMF released a report on Portugal’s progress under the country’s Economic Adjustment Program.
- "There is no doubt that Portugal has made remarkable progress over the past three years."
- Official financing from Portugal’s European partners and the IMF provided a window of opportunity to address root weaknesses and regain market confidence.
- Authorities made substantial progress in fiscal adjustment and frontloaded it to establish fiscal policy credibility.
- "All told, about two-thirds of the structural fiscal effort necessary to comply with the European Fiscal Compact’s medium-term objectives has now been completed."
- Wide-ranging structural reforms enacted to improve functioning of labor and product markets and the business environment.
- External adjustment has exceeded expectations, reducing need for overseas borrowing.
- Financial stability has been preserved; "sovereign yields recently dipped to their lowest level since April-2010."
Remaining risks and debt challenges
- "Risks persist; unemployment remains high" — unemployment remains elevated, especially for youth and long-term job seekers.
- Public debt and private sector debt levels:
- public debt "close to 129 percent of GDP"
- non-financial private sector debt "255 percent of GDP"
- Negative investment position vis-à-vis the rest of the world:
- "currently above 110 percent of GDP" and "tilted toward debt"
- Policy implications from debt position:
- Further fiscal consolidation and private sector deleveraging will be necessary.
- External borrowing "is not an option for the foreseeable future."
- The economy needs to generate external surpluses; investment must be geared toward tradable sectors; "growth and employment have to be driven by exports."
Competitiveness and labor costs
- Without exchange rate flexibility, improving competitiveness requires lowering unit labor and other input costs, raising productivity, and enhancing firms' ability to adjust to shocks.
- Progress noted in lowering unit labor costs in the private sector, aided by reforms softening employment protection and encouraging more flexible work arrangements.
- Reforms to collective bargaining helped better align wages and productivity.
- Relative significance of labor costs:
- "labor costs make up only about 30 percent of operational costs."
- Need to balance adjustment so burden does not fall excessively on labor; reduce other production costs.
- Priority product market reforms:
- increase competition and reduce rents in the nontradable sector
- identify remaining impediments to price flexibility and steps to boost productivity
- ensure new laws and regulations translate into effective change and lower input prices for exporters
Policy recommendations and next steps
- Persist with ambitious reforms to:
- "bring ongoing fiscal adjustment to term"
- "facilitate private sector deleveraging"
- "boost competitiveness"
- Avoid returning to the pre-crisis economic model of borrowing for consumption or unproductive investment.
- Sustain efforts to raise competitiveness as the only viable path forward.
- Recognize achievements to date and continue reforms "over coming years" irrespective of political leadership; build "as broad a consensus as possible."
IMF blog post by Subir Lall, February 19, 2014
Content in this bundle
- Portugal: Concluindo o trabalho; 18 de fevereiro de 2014
- Country Report