IMF Portugal loan: the same, wrong conditions

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The IMF’s executive board approved a payment in its lending programme to Portugal on Thursday after noting that the government had met all of its austerity and structural reform loan conditions, which have included several major labour market deregulation measures.

But the IMF also observed that Portugal’s economic performance is far weaker and unemployment much higher than it had anticipated:

- Unemployment is at 18 per cent and forecast to increase further; at the beginning of the loan two years ago, the IMF predicted unemployment would peak at 13.4 per cent

- GDP shrunk by 3.2 per cent last year and is expected to fall by an additional 2.3 per cent in 2013; two years ago, the IMF predicted 1.8 per cent shrinkage in 2012 and positive economic growth in 2013

- Public indebtedness is projected to increase to 124 per cent of GDP next year; two years ago, the Fund predicted it would peak at 115 per cent

It seems that the IMF has learned little from the errors in the Troika’s Greek loan programme. A Fund review last week acknowledged that the errors had included grossly underestimating the recessionary impact of austerity measures and carrying out debt restructuring too late.

Even though the IMF’s review of its Portuguese loan states that the economic outlook is "sombre", in a press briefing on Thursday the Fund’s mission chief for Portugal rejected the need for debt restructuring and declared that the programme has been a success:

"The overall situation is a difficult one, as you well know. The growth outlook is weaker than we had envisaged earlier. But in terms of program implementation … we really are satisfied."

The IMF’s loan review report for Portugal includes the following observations in the synopsis:

- "All performance criteria and structural benchmarks underpinning the review have been met."

- "The economic outlook, however, remains somber. Strong export growth … has of late started to decrease reflecting weakening demand from the rest of the euro area. The labor market situation also remains extremely difficult, with unemployment already at some 18 percent and employment losses set to continue."

- "Risks to the attainment of the program’s core objectives remain high. The solid social and political consensus that to date has buttressed strong program implementation has weakened significantly. Economic recovery is also proving elusive."