IMF Approves 839 Million-Euro Disbursement to Portugal

The International Monetary Fund agreed to disburse 839 million euros ($1.1 billion) to Portugal under a loan with the European Union and said the country needs a public debate on ways to further reduce its deficit.

“Considerable progress has already been made in fiscal and external adjustment, and sovereign spreads have narrowed significantly, which bodes well for the authorities’ strategy of regaining market access,” IMF Deputy Managing Director Nemat Shafik said today in an e-mailed statement. “Nonetheless, the near-term outlook is uncertain, and sizable medium-term economic challenges remain.”

Prime Minister Pedro Passos Coelho is battling rising joblessness and a deepening recession as he raises taxes to meet the terms of a 78 billion-euro international bailout. Portugal has already been given more time to narrow its deficit after tax revenue missed forecasts and the economy heads for a third year of contraction in 2013.

Portugal’s borrowing costs fell today as the government sold a combined 2.5 billion euros of three-, 12- and 18-month bills in its first auction of 2013.

While the fiscal targets are appropriate if growth doesn’t falter, the fund recommended a debate ‘on how to best share the burden of the remaining sizable fiscal adjustment” amid “an already high tax burden.” It also recommended a broader tax base.

Enormous Increase

Portuguese Finance Minister Vitor Gaspar on Oct. 3 said the government will implement an “enormous” increase in taxes on wages and other income to meet budget deficit targets in 2013. The government also plans to cut spending by about 4 billion euros in the two years through 2014.

The Portuguese government is studying proposals presented in an IMF report about spending, Carlos Moedas, secretary of state to the prime minister, said on Jan. 9.

“In addition to domestic efforts, success will depend critically on continued external support and successful crisis policies at the euro area level,” Shafik said. “Support from the Eurosystem is important to contain credit market segmentation and improve monetary policy transmission.”

Before it's here, it's on the Bloomberg Terminal.