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IMF and EU warn Portugal against ‘loosening’ budget effort

Published on 04/02/2016

Portugal's former international creditors voiced concern Thursday over a "loosening" of budget discipline and urged the new Socialist-led government to do more to spur economic recovery.

The International Monetary Fund (IMF) said Portugal’s 2016 draft budgetary plan “implies a loosening of the fiscal stance” after its experts finished a week-long review in Lisbon.

Meanwhile the European Commission and European Central Bank, whose officials also participated in the review of Portugal’s finances, said “progress in structural reforms lost momentum during 2015” and that “an effort to reduce the underlying structural budget deficit needs to be significantly increased”.

The IMF and EU provided Portugal with its three-year, 78-billion-euro bailout that ended in May 2014.

Brussels still has considerable leverage over eurozone member Portugal under EU budget rules.

Since taking office in November, Prime Minister Antonio Costa has sought to pull off a tricky balancing act, satisfying both Brussels and placating the domestic discontent over the years of austerity cutbacks which helped bring the Socialists to power.

Lisbon had hoped to bring its public deficit — the shortfall between government revenues and expenditure — down to 2.6 percent of economic output this year.

Last year, Portugal’s budget deficit came in at 4.2 percent, well above the EU’s 3.0-percent limit.

But after the Commission threatened to reject its first draft budget, the Portugese government on Thursday accepted pushing down the budget deficit to 2.4 percent.

“The Portuguese authorities have submitted proposals which are going in the right direction,” EU Economic Affairs Commissioner Pierre Moscovici said in Brussels.

“There is still work to do however and I hope we will reach an agreement within the next few hours,” he told a briefing on the European Commission’s winter growth forecasts.

The government also cut its 2016 growth forecast to 1.9 percent from 2.1 percent after Brussels deemed the figures too optimistic.

The IMF is more pessimistic about economic growth, predicting a 1.4-percent increase in gross domestic product.