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Portugal: Eighth and Ninth Reviews Under the Extended Arrangement and Request for Waivers of Applicability of End-September Performance Criteria—Staff Report
Summary:EXECUTIVE SUMMARY
Discussions for the combined eighth and ninth reviews were delayed by a political crisis
and marked by new adverse Constitutional Court rulings. Reflecting in part austerity and
reform fatigue, tensions within the ruling coalition led to two prominent cabinet members
tendering their resignations. The crisis triggered a government reshuffling, but uncertainty was
compounded by concerns about the predictability of policymaking following new unfavorable
Court rulings against an important public expenditure reform as well as steps to soften strict
employment protection rules. These developments led to elevated sovereign yields, delaying the
government’s plans to follow up on successful bond issues earlier this year.
The near-term economic outlook has nevertheless improved somewhat, and progress has
been made toward the program objectives. Recent economic data signal that the economy
may have bottomed out. Remedial actions were taken to address delays in reforms due to the
reorganization of the government. All end-June performance criteria and all but one structural
benchmarks underpinning the review have been met.
Program review discussions focused on measures needed to keep the program on track. It
was agreed that, in view of the now narrow path to full market access, adhering to the program
strategy was critical to signal commitment to reforms and boost confidence. The fiscal targets
were reaffirmed and fiscal measures were identified to underpin the targeted adjustment.
Discussions also focused on steps to strengthen supervision in view of the still challenging
conditions facing banks and on the structural agenda to boost competitiveness and growth.
Nonetheless, implementation risks are high, and political cohesion remains critical.
Renewed tensions within the government need to be avoided, as they would delay the recovery
and increase downside risks to the program. There is also a risk that new Constitutional Court
rulings will further complicate policy making and heighten economic uncertainty. Decisive policy
responses in case this risk materializes will be essential since the room for maneuver under the
program has become limited.
Staff supports the authorities’ request for completion of the combined eighth and ninth
reviews and for waivers of applicability of the end-September PCs. The purchase released
upon completion of this review would be in an amount equivalent to SDR 1679 million.
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