## IMF Executive Board Concludes Fifth Post-Program Monitoring with Portugal

_IMF News, February 22, 2017_

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## Bibliographic details
- Published: February 22, 2017

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### Overview
- Date: February 22, 2017
- After a sluggish first half, the economy experienced an upturn in growth in the second half of 2016, boosted by stronger exports and a further decline in unemployment to pre-crisis levels.
- Revised 2016 fiscal target appears likely to have been met.
- Prospective public outlays for banking sector recapitalization continue to weigh on public debt trends.
- Portugal has continued to successfully access bond markets and its capacity to repay the Fund is expected to be adequate.
- Public debt remains high and large annual financing needs, combined with banking system challenges, leave Portugal vulnerable to shocks and tightening financing conditions.

### Executive Board Assessment
- Directors agreed with the thrust of the staff appraisal and welcomed improved macroeconomic performance in H2 2016: pick‑up in growth, decline in unemployment, and a fiscal outturn in line with the target.
- Emphasis on the need for stronger momentum to:
  - improve financial sector resilience,
  - ensure durable fiscal consolidation,
  - raise potential growth.
- Authorities’ capacity to repay the Fund assessed as adequate.

### Banking Sector: NPLs, Clean-up, and Resilience
- Directors welcomed authorities’ recognition that continued efforts to improve banking sector soundness are warranted.
- Key recommendations and observations:
  - A comprehensive clean‑up of bank balance sheets is essential to break the vicious circle between weak banks, high non‑performing loans (NPLs), and low growth.
  - Clean‑up should include a predictable, time‑bound, and credible plan for banks to write‑off or restructure non‑performing legacy assets.
  - Strengthen internal governance and improve bank profitability, including by further cutting costs.
  - Measures to attract new private capital to support bank balance sheet clean‑up.
  - Encouragement of authorities’ proposals to address NPLs, including supervisory, legal, and judicial measures to incentivize banks to dispose of non‑performing loans and reduce corporate debt.

### Fiscal Policy and Public Debt
- Directors welcomed the authorities’ commitment to continued fiscal consolidation and noted their five‑pillar strategy.
- Fiscal policy guidance:
  - Need for a well‑specified medium‑term fiscal adjustment path balancing debt reduction and support for growth.
  - Preference for consolidation relying more on durable expenditure reform and greater spending efficiency, and less on one‑off measures and capital expenditure compression.
  - Importance of strengthening the budget process.
- Note: Prospective public outlays for banking sector recapitalization continue to weigh on public debt trends.

### Structural Reforms and Competitiveness
- Reinvigorating macro‑critical structural reforms is essential to boost competitiveness, growth potential, and resilience to shocks.
- Encouraged reform areas:
  - Labor and product markets, with focus on tackling labor market segmentation.
  - Improving education and skills.
  - Enhancing public sector efficiency.
  - Removing regulatory barriers and strengthening institutional capacity.
  - Addressing other supply bottlenecks.
- Cautionary note: Ensure increases in the minimum wage do not impair labor competitiveness and undermine prospects for new entrants to the labor force.

### Selected Economic Indicators (Year-on-year percent change, unless otherwise indicated)
- Projections (columns correspond to 2015, 2016, 2017, 2018 where provided)

- Real GDP
  - 2015: 1.6
  - 2016: 1.3
  - 2017: 1.2

- Private consumption
  - 2015: 2.6
  - 2016: 2.0

- Public consumption
  - 2015: 0.8
  - 2016: 0.6
  - 2017: 0.3

- Gross fixed capital formation
  - 2015: 4.5
  - 2016: -1.1
  - 2017: 2.8
  - 2018: 2.4

- Exports
  - 2015: 6.1
  - 2016: 3.5
  - 2017: 3.6
  - 2018: 3.9

- Imports
  - 2015: 8.2
  - 2016: 3.2

- Contribution to growth (Percentage points)
  - Total domestic demand: 1.4
  - Foreign balance: -1.0
  - 2016: 0.1
  - 2017: 0.0
  - 2018: -0.1

- Resource utilization
  - Employment
    - 2015: 1.1
    - 2016: 1.0
    - 2017: 0.5

- Unemployment rate (Percent)
  - 2015: 12.4
  - 2016: 11.0
  - 2017: 10.6
  - 2018: 10.1

- Prices
  - GDP deflator: 2.1
  - Consumer prices (Harmonized index): [no figure provided in source]

- Money and credit (End of period, percent change)
  - Private sector credit
    - 2015: -4.1
    - 2016: -2.2
    - 2017: -0.5
  - Broad money
    - 2015: 4.6
    - 2016: 2.2

- Fiscal indicators (Percent of GDP)
  - General government balance
    - 2015: -4.4
    - 2016: -2.6
    - 2017: -2.1
    - 2018: -2.3
  - Primary government balance
    - 2015: 0.2
    - 2016: 1.8
  - Structural primary balance (Percent of potential GDP)
    - 2015: 3.3
    - 2016: 2.7
    - 2017: 2.3
  - General government debt
    - 2015: 129.0
    - 2016: 130.8
    - 2017: 129.8
    - 2018: 128.7

- Current account balance (Percent of GDP)
  - 2015: 0.4
  - 2016: -0.6
  - 2017: -0.7

- Nominal GDP (Billions of euros)
  - 2015: 179.5
  - 2016: 184.7
  - 2017: 189.7
  - 2018: 194.6

- Sources listed in release: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); Eurostat; and IMF staff projections.

*Press Release No. 17/57, IMF Communications Department, February 22, 2017.*

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## References

- [The Executive Board](http://www.imf.org/external/np/sec/memdir/eds.aspx)
- [Portugal and the IMF](http://www.imf.org/external/country/PRT/index.htm)
- [Press Releases](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [http://www.imf.org/external/np/sec/misc/qualifiers.htm](http://www.imf.org/external/np/sec/misc/qualifiers.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2017/02/22/pr1757-imf-executive-board-concludes-fifth-post-program-monitoring-with-portugal_