IMF LENDING CASE STUDY: PORTUGAL

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Portugal adopted the euro in 1999, which increased integration with the European Union and allowed borrowing at record-low interest rates.
Uncontrolled public and private spending led to surging indebtedness and lack of necessary structural reforms.
By 2011, Portugal entered a full-blown economic crisis:
- Overall fiscal deficit in 2010 ballooned to about 11 percent of GDP.
- Unemployment climbed to 16 percent in 2013.
- Yields on Portuguese sovereign bonds moved into double-digit territory.
In spring 2011, Portugal reached out to the IMF and the European Union.

The agreement with international partners provided financial assistance worth €78 billion ($116 billion; £70 billion), of which one-third was committed by the IMF.
Portugal committed to:
- Progressively cutting its deficit.
- Facilitating bank capitalizations.
- Implementing structural reforms, including labor reforms.
- Lowering the public sector wage bill.
- Reducing the most generous state pensions.
- Privatizing stakes in national energy companies and selling the national airline.
The 2011–14 program prioritized social cohesion by consulting unions, business groups, the opposition party in Parliament, and social partners to build consensus and explain the need for measures.

Broad consultation and consensus-building were central to program implementation.
Program implementation continued without interruption even after a change of government, reflecting the political consensus achieved.

Fiscal and market outcomes reported by the IMF:
- From a fiscal deficit of about 11 percent of GDP, the government targeted a small deficit in the year of reporting.
- The primary surplus was expected to hit its highest level since 1992.
- Yield on a 10-year bond was about 1.1 percent.
- Joblessness stood below 7 percent — its lowest level since 2004.
Economic recovery features:
- Improved business environment, aided by labor reforms.
- Recovery driven by a boom in tourism and exports.
- A revitalized risk profile in international markets attributed in large part to responsible fiscal policies of the preceding years.
The IMF characterized Portugal as having a solid base to continue strengthening potential and reversing past excesses.

Political consensus and social cohesion are critical to sustain implementation of fiscal consolidation and structural reforms.
Combining fiscal adjustment with structural reforms and measures to stabilize the banking sector can restore market confidence and reduce sovereign yields.
Transparent consultation with social partners can enable continuity of program implementation across political transitions.