On 16 May 2022 the IMF published a report following discussions with Portugal under Article IV of the IMF’s articles of agreement.

Following a deep recession during the pandemic the economy has begun to recover. The economy was hit harder than many due to its reliance on tourism, but a strong policy response has lessened the impact on households and businesses. The early easing of restrictions helped by the vaccine policy has boosted the recovery during early 2022.

The Ukraine war has increased risks to the economy owing to higher commodity prices, supply bottlenecks, weaker confidence and reduced external demand. Growth is projected to be around 4.5% in 2022 and 2% in 2023, led by private consumption, public investment and exports. By 2023 tourism will be back to its level before the pandemic. In the medium term, growth will fall below 2%. There are downside risks from the uncertainty caused by the Ukraine war and the possibility of new developments in the pandemic.

The IMF considers that it is now appropriate for the pandemic support measures to be phased out, although a supportive fiscal policy should continue. Any further support should be targeted and for a limited time only.

From 2023, the report notes that a fiscal adjustment is required to manage the ageing-related spending pressures, raise public investment and reduce the risks from high levels of debt. A growth friendly fiscal adjustment is necessary, based on tax reforms, rationalisation of current spending and maintenance of strong public investment to enhance growth.

The IMF considers that the tax reforms should aim to increase efficiency, eliminate distortions and broaden the tax base. Analysis of tax policy and tax expenditure should be strengthened, and tax incentives should be limited and streamlined. The government should review the reduced value added tax (VAT) rates and strengthen revenue raising measures that are less distortionary to the economy, such as property taxes and taxes related to the environment.

To improve governance, efficiency and productivity in the corporate sector, steps should be taken to improve the legal framework. These could include measures to simplify and strengthen the effectiveness of the business restructuring and insolvency laws.

The Recovery and Resilience Plan (RRP) provides a chance to make the economy more dynamic and to promote green investment. Further structural reforms to increase skills and competitiveness, combined with fiscal consolidation, are important for maintaining stronger saving and investment rates in the medium term.

In the labour market the government must take measures to address the skill gap which is an obstacle to stronger growth. The RRP contains targets and reforms to increase levels of education and training, put in place more facilities for low-skilled adults to continue lifetime learning, reduce the gaps in digital skills and increase employability.

Another issue that must be addressed is the difference in job security and working conditions between permanent and temporary contracts. The policies planned for the labour market should combine more flexibility for permanent contracts with increased protection for workers under temporary contracts.

The IMF considers that further measures are required to achieve the government’s climate targets. A carbon tax was introduced in 2015 and coal-fired power plants were phased out by 2021. The share of electricity derived from renewables is currently one of the highest in the EU. There are also plans to invest 3% of GDP by 2030 in support of climate-related research and innovation.

The report notes that achieving the targets for energy efficiency, renewables, decarbonization and the bioeconomy will need faster implementation of the Roadmap for Carbon Neutrality 2050 and the National Energy and Climate Plan. There will need to be faster implementation of measures to promote the use of biofuels and hydrogen in the transport sector, and accelerated renovation of buildings. In view of Portugal’s exposure to extreme weather events, there should also be more investment in risk prevention and preparedness.