Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultationwith Portugal on Friday, June 23, 2022.
Growth in 2021 rebounded to 4.9 percent, driven by private consumption, investment, exports of goods, and gradually recovering tourism. The unemployment rate dropped to pre-pandemic levels on account of rising employment and participation rates. While growth strengthened in early 2022, the war in Ukraine is expected to dampen the recovery for the rest of the year through a significant deterioration in external demand, higher commodity prices, longer-lasting supply-side disruptions, lower confidence and tighter financial conditions. Growth in 2022 is projected to average 5.8 percent and 1.9 percent in 2023. Inflation has accelerated on the back of higher commodity prices and is projected to average 6.1 percent in 2022, before receding to 3.5 in 2023. The current account deficit is set to widen in 2022, before narrowing over the medium term as exports and tourism strengthen.
Despite the accommodative fiscal stance in 2021, the headline fiscal deficit dropped to 2.8 percent of GDP, reflecting buoyant tax revenues and some capital underspending. In 2022, the fiscal deficit is expected to narrow to 2.2 percent of GDP, reflecting the recovery and unwinding of remaining temporary Covid-19 economic support measures. On this basis, fiscal policy will remain suitably accommodative with measures to mitigate impacts of high energy prices and grant-financed investment supporting the recovery. Public debt is projected to steadily decline to below 100 percent of GDP over the medium term.
The corporate sector has withstood recent shocks well so far, although solvency gaps are estimated at more than 2 percent of GDP. Credit quality deterioration after the end of the relatively extensive loan moratoria has yet to fully materialize. Bank capital, profitability, and asset quality have steadily improved in 2021 but remain below EA averages. A few legacy domestic banks are still to complete their restructuring process. As in rest of EA, residential real estate prices have risen sharply, though attendant risks appear contained.
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ comprehensive policy response to the pandemic, including their successful vaccination campaign, which has supported the recovery. Noting that important downside risks remain, including the spillovers from the war in Ukraine and the protracted effects of the pandemic, Directors underscored the need to strike the right balance between supporting the recovery and rebuilding fiscal buffers and continuing with structural reforms that bolster stronger, more resilient, and private sector-led growth.
Directors agreed that near-term fiscal policy should remain accommodative and better targeted. In particular, the broad-based measures implemented in response to the energy shock should be kept temporary and preferably replaced with more targeted support. While emphasizing that fiscal policy should remain flexible this year, Directors also recommended greater savings should fiscal outcomes overperform. Recognizing the need to rebuild fiscal space for future shocks, address long-term ageing pressures, and mitigate public debt risks, Directors encouraged the authorities to pursue a gradual and growth-friendly fiscal consolidation starting from 2023. In particular, they called for reducing tax expenditures, enhancing pension sustainability, and strengthening public financial management.
Directors welcomed that the banking system has weathered the crisis well thus far and agreed that risks should be carefully monitored. They encouraged close vigilance of banks’ asset quality and further strengthening banks’ capital buffers. Directors also encouraged the authorities to continue monitoring risks from rising house prices. They welcomed the strengthening of corporate debt restructuring frameworks and called for further improvements in the insolvency regime. Directors recommended prompt private-led recapitalization of viable firms to mitigate corporate debt overhang risks, smooth resource reallocation, and limit scarring.
Directors welcomed the authorities’ comprehensive structural reform and investment agenda anchored in the National Recovery and Resilience Plan (NRRP). They emphasized the need for efficient implementation and oversight to maintain strong investment absorption capacity and maintain the reform momentum. Directors underscored the potential of the NRRP to raise skill levels, digitalization, productivity, and living standards durably, and called for complementary reforms to address labor market duality and reduce youth unemployment. They commended the authorities’ ambitious targets and policies to address climate change challenges. Directors saw merit in considering further increasing the carbon price-once the energy crisis subsides-while protecting the most vulnerable households.
(Year-on-year percent change, unless otherwise indicated)
Gross fixed capital formation
Contribution to growth (Percentage points)
Total domestic demand
Unemployment rate (Percent)
Consumer prices (Harmonized index)
Fiscal indicators (Percent of GDP)
General government balance
Primary government balance
Structural primary balance (Percent of potential GDP)
General government debt
Current account balance (Percent of GDP)
Nominal GDP (Billions of euros)
Sources: Bank of Portugal; Ministry of Finance; National Statistics Office (INE); Eurostat; and IMF staff projections.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.