Growth in one of Europe’s troubled economies, Portugal, is now expected to decline by 3% in 2012 and not the initial forecast figure of almost 3.5%, mainly on the back of stronger-than-expected exports, which are expected to more than offset weaker domestic demand, according to the International Monetary Fund (IMF).
Officials from the IMF, European Commission (EC) and European Central Bank (ECB) visited the Portuguese capital Lisbon from May 22 to June 4 for the fourth quarterly review of Portugal’s economic programme.
Portugal, like Greece, Ireland, Italy and Spain is implementing austerity measures to resolve debt and economic woes.
The Portuguese government’s programme is supported by loans from the European Union (EU) amounting to EUR52bn and a EUR26bn extended fund facility with the IMF. Approval of the conclusion of this review will allow the disbursement of EUR4.1bn - EUR2.7bn by the EU and EUR1.4bn by the IMF.
These disbursements could take place in July subject to the approval of the IMF executive board and the Euro Group.
The review showed the three institutions now expected positive albeit subdued growth for the country in 2013.
Unemployment had increased sharply as part of the adjustment process, the review said, and this could peak at close to 16% in 2013.
Temporarily higher unemployment had been exacerbated by Portugal’s longstanding labour market rigidities, according to the review.
"The broader structural reform agenda and rising capacity utilisation in the export sector should help employment recover in the medium term. Nevertheless, further action to improve the functioning of the labour market is urgent," the officials from the three institutions cautioned.
They called for institutional reforms that gave companies more flexibility in matching labour costs and productivity.
The IMF said that notwithstanding the weaker labour market and a less tax-friendly growth composition, the authorities expected to achieve the deficit target of 4.5% of GDP.
New fiscal measures were not discussed, but the officials noted that developments warranted close monitoring to detect potential slippages in a timely manner.
Reforms of state-owned enterprises and public-private partnerships were on track, the officials reported.
"Efforts to strengthen public financial management, bolster tax compliance and streamline public administration are continuing at a good pace," they said.
Portugal’s authorities were reported to be finalising efforts to ensure that midyear targets for banks’ capital buffers would be met.
Further progress had also been made in strengthening the banking supervision and resolution frameworks, the IMF noted.
The efforts of the Portuguese authorities are being complemented by a strengthened EU economic policy framework and new EU initiatives to support growth and employment in Portugal, and in Europe as a whole.
The joint mission for the next programme review is expected to take place in September.