IMF Says Portugal’s Growth Constrained by Heavy Debts

While many nations in Europe have been experiencing healthy levels of economic growth over the last few years, there are a few notable standouts. Portugal is one nation with such a dubious distinction. Unfortunately, the International Monetary Fund (IMF) warns that, despite its economic growth, Portugal’s condition will not improve until the country gets a handle on its debts.

While many nations in Europe have been experiencing healthy levels of economic growth over the last few years, there are a few notable standouts. Portugal is one nation with such a dubious distinction. Unfortunately, the International Monetary Fund (IMF) warns that, despite its economic growth, Portugal’s condition will not improve until the country gets a handle on its debts.

While the nation has made some inroads of late, Prime Minister Antonio Costa will have to keep up these efforts if the country wishes to see real economic growth, the IMF said in a statement published Thursday. The statement contained a report on Portugal’s economic progress since exiting its bailout. It found that while unemployment has declined and investor confidence (both foreign and domestic) has improved, there were still a few areas requiring attention. As noted in the statement, “growth prospects remain constrained by high levels of indebtedness and structural bottlenecks…High public debt leave little scope for relaxation of the fiscal stance.”

Portugal’s Prime Minister has had less than three months on the job to try to turn around the lagging economy. Yet, he has already announced plans to undo some of the measures introduced by his predecessors as part of Portugal’s bailout by the IMF and the European Union (EU). For example, he hopes to increase state salaries, raise family incomes, reduce austerity measures, and make other changes designed to improve the economic situation of the common Portuguese citizen.

While these measures may be popular with voters, the IMF has its concern. Recently, it has said that Costa’s proposed budget “implies a loosening of the fiscal stance.” Per the IMF’s estimates, if the budget is adopted in its current state, it will create a deficit of 3.2% of gross domestic product (GDP) by the end of 2016. That nearly doubles the deficit of 1.8% experienced under the prior administration’s stability programs. For its part, the Portuguese government seems far less concerned than the IMF with these figures.

According to the government’s estimates, the shortfall for 2016 should be around 2.6%. That is obviously narrower than the IMF’s prediction, but still much higher than the economy’s performance in 2015. Moreover, it forecasted a debt-to-GDP ratio of 126% by the end of 2016. The IMF predicts that Portugal’s plans may have disastrous consequences. “The banking system’s balance sheets need to be strengthened to avoid further negative surprises and protect taxpayers…A more ambitious approach to corporate debt workouts is needed.”