Staff teams from the European Commission (EC), European Central Bank (ECB), and the International Monetary Fund (IMF) visited Lisbon during November 7-16 for the second quarterly review of Portugal’s economic program. Among the conclusions raised by them, overall the program is off to a good start. However, its success crucially depends on continued implementation of a wide range of structural reforms.

The second quarterly review of Portugal’s economic program has been done by staff teams from the European Commission (EC), European Central Bank (ECB), and the International Monetary Fund (IMF) visited Lisbon during November 7-16. The mission has reached staff-level agreement on economic and financial policies to meet the program’s objectives. Although the program is off to a good start, its success depends on continued implementation of a wide range of structural reforms that will remove the rigidities and bottlenecks behind Portugal’s decade-long growth stagnation. The EU already welcomed Portugal's Government Programme when it was presented in May 2011.

Among the findings, the mission recommends that in order to improve labour cost competitiveness, wages in the private sector should follow the lead taken by the public sector in implementing sustained pay cuts. The program envisages measures to reduce dismissal costs and increase wage flexibility at the firm-level. As for tackling entrenched practices that distort competition, a strengthening of the competition framework is underway and progress has been made on liberalizing the telecommunication markets. Nevertheless, more progress on curbing rent-seeking in sheltered sectors, particularly energy and regulated professions, is needed. The mission agrees with the authorities that a fresh and determined effort is required to re-invigorate the structural reform agenda in scope, focus, and specificity.

Additionally, the mission considers that implementation of the 2012 budget will need to be accompanied by flanking measures to address still rising spending arrears and to reduce other fiscal risks, particularly at the level of local and regional governments and the state-owned enterprises. On the other hand, growth in 2011 is likely to be somewhat better than foreseen in the program, but the recession in 2012 is now projected to be more pronounced, with GDP expected to contract by 3 percent and risks to the outlook tilted to the downside.

The loans from the European Union amounting to €52 billion and a €26 billion Extended Fund Facility with the IMF to support the government’s program. Approval of the conclusion of this review will allow the disbursement of €8 billion (€5.3 billion by the EU, and €2.7 billion by the IMF). The joint mission for the next program review is expected to take place in February 2012.