IMF proposes measures to bring down budget deficit

news: IMF proposes measures to bring down budget deficit

THE INTERNATIONAL Monetary Fund (IMF) has warned Portugal that the Socialist (PS) government’s measures to deal with the current economic crisis and budget deficit will not be sufficient to plug the debt by 2008.

It said that the package of measures announced by the government in its Consolidation Plan would fail to bring the national GNP debt within the three per cent ceiling stipulated by the European Union’s Stability Pact and Growth Plan.

According to the international financial body, the government’s medium term measures for spending are “the appropriate ones” but “additional measures will be necessary” to really bridge the gap.

Following an in-depth study, the IMF’s projections for Portugal indicate an increase in economic growth of two per cent by 2008, although Bank of Portugal chief, Vítor Constâncio, admitted earlier this month that the “country’s economic situation was worse than had been anticipated” and that growth for the next 12 months was likely to be around 0.5 per cent – one-and-a-half points below the latest projected figures released. This technically means that Portugal is now suffering from a stagnant economy and has entered an official state of recession.

Addressing 300 key foreign businessmen at last week’s American Club of Lisbon luncheon, Prime Minister José Sócrates swept the key, national economic issues under the carpet, while blaming the recession on Europe in general (see article on p.7). He failed to elaborate on difficult questions concerning his government’s IVA (VAT) rises from 19 per cent to 21 per cent, and failed to address the problem of exactly how the Socialists were going to kick-start the economy and attract desperately needed foreign investment.

The IMF says the government must either raise productivity or make further cuts to the tune of 0.75 per cent of the GNP, if it is to keep within the three per cent limit by 2008.

Two weeks ago, former Social Democrats (PSD) Prime Minister, Cavaco Silva, blasted the current PS government for raising IVA, saying such measures would only serve to harm the general public, small and medium businesses, frighten away investment and cause business defection to Spain, which enjoys an IVA rate at 16 per cent.

The government says the measures are necessary to control public consumer spending and meet its social, health, education and welfare obligations. Instead, he advocated that the government needed to seriously cut back the still bloated public administration sector and bureaucracy.

Key government and public administration figures have also come under widespread fire from the national press over the enormous ‘fat cat’ salaries, averaging 20,000 euros a month, that some public sector chief executives currently take home, saying that this flew in the face of reason and common sense during the worst economic crisis in recent years.

The IMF has also called on Portugal to rapidly clarify the details of its medium term Consolidation Plan until 2006 and implement the necessary reforms “to increase the programme’s credibility”.

Sócrates says that Portugal is dealing with an economic depression that followed years of growth when the single currency was introduced. “I wouldn’t deny that we are facing an extremely difficult economic situation and that the return to economic growth will be difficult and gradual,” he said.

The IMF has given a cautious welcome to the private involvement in recently announced public works schemes, such as the new airport at Ota and the TGV, while saying that the risks need to be carefully monitored. Historically speaking, Haljmar Schacht/Hoover style public work programmes have been proven not to solve a country’s long-term economic problems because they do not create products that can be exported or sold on the internal market.

Chris Graeme