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IMF worried over Portugal’s budget ‘loosening’

Published on 04/02/2016

The International Monetary Fund (IMF) urged Portugal on Thursday to do more to spur economic recovery, voicing concern over a "loosening" of budget discipline by the new Socialist-led government.

“Portugal needs to build on the progress made in recent years in stabilising the level of public debt through its successful fiscal adjustment,” an IMF delegation said following a week-long mission to Lisbon.

“Looking forward, a continuation of these efforts would help maintain Portugal’s hard-won credibility and market confidence. In this context, the authorities’ commitment to medium term fiscal consolidation is welcome,” it added.

IMF officials, giving their assessment after a third visit since the end in May 2014 of a 78-billion-euro international aid programme, said Portugal’s 2016 draft budgetary plan “implies a loosening of the fiscal stance”.

“In addition to sufficiently ambitious budgetary targets, the authorities should consider maintaining appropriate buffers to guard against fiscal risks,” said the IMF.

The IMF forecasts Portugal’s public deficit this year at 3.2 percent of gross domestic product (GDP), while Lisbon had hoped to bring it down to 2.6 percent, according to its preliminary draft budget.

The IMF is also more pessimistic about economic growth, predicting a 1.4 percent increase in GDP compared to the 2.1 percent foreseen by Lisbon.

Under pressure from Brussels, which threatened to reject its first draft budget, Lisbon was planning to approve Thursday a more demanding budget to bring down the deficit to 2.4 percent of GDP, with a more modest growth forecast of 1.9 percent, a government source told AFP.

The European Commission on Tuesday demanded Lisbon rework its draft budget — which was delayed by Portugal’s inconclusive October elections — because it fell short of commitments to reduce public spending.

The Commission, the executive arm of the EU’s 28 member states, has until Friday to decide if Portugal’s budget is in violation of the bloc’s rules, in which case it must be resubmitted.

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.