(Reuters) - It is critical that Portugal persevere with pushing through its ambitious fiscal program and economic reforms especially in the face of a weakening global economy, the International Monetary Fund said on Monday.
“Control over spending commitments, which is being strengthened in the context of on-going fiscal structural reforms, will be important for meeting the targets,” IMF First Deputy Managing Director David Lipton said in a statement.
The IMF earlier approved a loan disbursement of 2.9 billion euros ($3.78 billion) for Portugal under a 78 billion euro IMF-EU rescue loan approved earlier this year.
Lipton said state support for bank recapitalization may be needed despite banks’ strong efforts to raise capital from private sources.
“In light of the fiscal contraction and much weaker external demand, it is even more critical to ensure that bank deleveraging does not come at the cost of excessive contraction in credit to dynamic enterprises,” he added.
As Portugal cannot devalue its currency to become more competitive, its IMF-EU-supported economic program resorts to what economists call “fiscal devaluation” - cutting employers’ payroll taxes to reduce the cost of labor and replacing it with an increase in Value-Added Tax, or VAT.
Lipton said a decision by Portugal not to implement fiscal devaluation created a “considerable gap” in its reform agenda and it needs to find alternative measures to make up for that.
($1 = 0.7682 euros)
Reporting By Lesley Wroughton; Editing by Dan Grebler and Andrew Hay