On this initial post, I will refer to my experience at the IMF to speculate about economic policy in Portugal in the next few months. It is usually claimed that economic policy will be limited to the application of the vast program agreed with the international institutions, but this is not necessarily true. Every IMF program has quarterly reviews when staff assess whether the program is on track, a necessary condition for the IMF’s Executive Board to approve the corresponding disbursement. The approval of Portugal’s first review, to be completed by September 15th, will release €3,8 billion from the IMF and twice as much from the European financing facilities. In preparation for that review, a troika mission will be in Lisbon for much of August, to analyze June data and the conditionality for end-July.
It is very common that the details of an IMF program change during the quarterly reviews. As long as the main objectives of the program are not at risk, the IMF tends to accept any changes of one measure for another that the local government proposes. It is possible that review dynamics are different in the case of euro-zone countries, making changes less likely since many institutions are involved. However, yesterday’s Eurogroup decision to approve the latest review of the Greek program, has proved that even for euro-zone countries the program that is implemented can be quite different from the program initially approved.
Less than two months ago, international experts made a thorough review of Portugal’s budget, and concluded that the 2011 targets could be achieved with implementation of the 2011 budget and a few extra expenditure measures. Nevertheless, the first real decision of the new Portuguese government was the creation of an extraordinary income tax to raise an additional €800 million. Why? My guess is that the government realized that the expenditure cuts incorporated in the 2011 budget will not materialize, and went for the easy option: a tax increase. Given that programs can be adjusted during reviews, I am afraid that this will happen often: having failed to achieve the proposed expenditure cuts, the government will replace them with tax increases. In the end, instead of a program with a reasonable expenditure / revenue mix of measures (two thirds / one third), we may end with a growth crippling one third / two thirds mix.
Sunday, 3 July 2011
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The title of this post lends itself to the more pressing question: Can the IMF monster be tamed?
ReplyDeleteJust a quick note to say thank you for such an excelent blog about the Portuguese economy! As a Portuguese ex-patriot, I look forward to visiting this site more regularly. Keep up the great work. :-)
ReplyDeletePerhaps I should spend a few hours reading recent past posts on this blog before asking my questions, but feel free to point me to articles already written if they answer my question(s).
ReplyDeleteI'd like to ask the blog authors the following:
1) Given the horrendous historic record of the IMF in successfuly restoring the economic prosperity of any single country that it elected to "help", why is Portugal considering IMF loans versus putting further pressure on the ECB and/or private lenders (i.e. China); or if I may have the audacity to suggest - why is there such little talk of just outright defaulting on its national debt... aside from the possibly political "suicide" such a decision may have in the near term for any government that suggests it. Iceland seems to have been doing pretty well since it's default. Also Argentina and Venezuela are all the better for it. A sudden heart attack that doesn't kill the patient might be preferable to a slow but agonizing death, no?
2) To what degree can we attribute Portugal's economic failures to Socialist ruling parties over the past few decades? Is there any kind of direct correlation, given nearly every other more successful Western European country does not have socialist ruling parties?
3) What if any industry present or near-future, do you think Portugal can ressucitate or elevate to assist in the ascendance of it's GDP and/or to contribute significantly to its debt repayments - assuming the national goal continues to be that as opposed to default?
4) What do you see as the probability of Portugal experiencing severe civil riots in urban cities much like we've been witnissing in Greece?
5) What do you believe might be some of the strategies the newly formed government might enact in order to attempt to rescue Portugal from the brink of economic collapse?
6) Can the European Union minimize the acceleration of a Euro collapse by restricting/stoppping or minizing the impact of CDS (Credit Default Swap) derivative international players? (Forgive me if this is a naive question - but it seems at a glance these vigilantes or perhaps should I call them monetary 'vultures', appear to be making a bad situation much worse when the going gets tough).
7. To what degree do you attribute the difficult Portuguese economic situation to rencent historic corruption and misuse of national funds - as compared to other richer European countries. I.e. France, Germany.
That's enough for now. Looking forward to reading more in your blog.
Best Regards,
Luis