Abstract
This paper presents Portugal’s third review under the extended arrangement and request for waiver of applicability of end-March performance criteria. The government has initiated labor market reforms, privatizations, telecom sector liberalization, and improved competition framework. Competitiveness indicators are showing some signs of improvement with wages declining in some sectors and a sizable improvement in the current account deficit in 2011. Although the banking system continues to be heavily reliant on euro system funding, the required adjustment in banks’ balance sheets has started.
1. This statement provides an update on information that has become available and policy developments that have taken place since the staff report was circulated to the Executive Board on March 22, 2012. This information does not alter the thrust of the staff appraisal.
A. National Accounts for 2011
2. The 2011 national accounts data released by the National Statistics Institute (INE) point to a slightly lower nominal GDP than estimated in the staff report. This reflects both weaker real GDP growth—-1.6 percent compared to -1.5 percent in the report—and a lower increase in the GDP deflator. Overall, nominal GDP is now estimated to have reached €171 billion in 2011 (compared to €171.7 billion in the report).
B. Fiscal Deficit and Debt
3. The fiscal data commonly used for reporting to the European Commission (Excessive Deficit Procedure [EDP]) point to a slightly higher general government deficit (on an accrual basis) and debt than estimated in the staff report.
The overall general government deficit amounted to 4.2 percent of GDP (compared to 4 percent of GDP in the report). The difference reflects primarily lower VAT (cash accrual adjustments of 0.1 percent of GDP) and higher-than-expected payables from the Madeira region (0.1 percent of GDP). These changes do not affect performance with respect to the end-December performance criterion (PC) on the general government deficit as this is monitored on a cash basis.
Government debt was also revised up by about €1 billion compared to the previous estimate (now 107.8 percent of GDP compared to 106.8 percent of GDP in the report) mainly reflecting the reclassification of government payables to Parpública as formal debt and, to a lesser extent, a PPP reclassification. Given that the end-December PC on government debt was met by over €7 billion, the revision does not affect staff’s assessment that the PC was met.
C. Arrears Strategy
4. The Council of Ministers adopted on March 29 a strategy to clear the stock of domestic arrears (prior action). The strategy document, consistent with earlier understanding with staff, provides an overview of the domestic arrears problem and establishes governance arrangements for prioritization and payment decisions. The strategy calls for the government to settle up to €1.5 billion of arrears in the health sector—an amount corresponding to underfunding by the State during 2009–11—and identifies maturity as the primary criterion for prioritizing payments. The rest of the arrears (including from local and regional governments) will be cleared over time, using own resources of the various entities responsible for their accumulation. The Inspectorate General of Finance will be in charge of verifying the validity of the claims and ensuring the new Law on commitment control is properly implemented by spending units before any settlement takes place.
D. Resolution of BPN
5. The sale of Banco Português de Negócios (BPN) has been finalized. Following the approval of the restructuring of BPN by the European Commission under EU state aid rules on March 27, 2012, the sale of the bank to Banco BIC was completed on March 30, 2012. The successful transaction marks an important milestone, restoring the company’s viability through a restructuring of its activities and operations, and integration with BIC.