BRUSSELS (MNI) – Portugal remains “broadly on track” with its
economic and fiscal reform programme but “rising stress in Europe is a
serious risk,” the IMF said on Tuesday.

In a report on the country, to which EU countries and the IMF have
pledged E78 billion in bailout aid, the IMF said Portugal had met “all
quantitative performance criteria and all structural benchmarks,” but
that an “indicative target on non-accumulation of domestic arrears was
breached.”

“While progress against program targets has been good and there is
strong commitment to the program, headwinds are increasing and
perseverance is essential,” the IMF said, describing Lisbon’s budget
targets as “ambitious.”

After discovering a larger-than-expected shortfall in the budget
earlier this year, Portuguese authorities have attempted to reach their
fiscal deficit target of 5.9% of GDP with a one-off partial transfer of
banks’ pension funds and promises of bold measures, including wage cuts,
in 2012.

The IMF said Portugal has made a good start on labour market
reforms but that more effort is needed to improve competitiveness.

The Fund also warned that “close monitoring of banks’ deleveraging
plans remains essential to prevent an excessive contraction in private
credit” and that “any public recapitalization of banks needs to ensure
that banks continue to be managed on a commercial basis.”

According to the IMF, Portugal’s domestic economy is expected to
shrink by 1.6% in 2011, a somewhat milder contraction than previously
expected. Nevertheless, the IMF cut its forecast for GDP in 2012 to -3%
to reflect the impact of tough austerity measures and a weaker
international economy.

Inflation in 2012 is projected to reach 3.2%, despite the weak
economy, as a result of VAT increases and tariff hikes.

Although the IMF said that “euro-area wide efforts to address the
broader sovereign debt crisis” were needed to help Portugal meet its
targets, it stopped short of calling on the EU to do more to help the
country, as it did in its report on Ireland, also published today.

–Brussels bureau: +324-9522-8374; pkoh@marketnews.com

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