June 8, 2015 / 3:27 PM / 2 years ago

UPDATE 1-IMF increases Spain GDP growth targets for 2015, 2016

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MADRID, June 8 (Reuters) - The International Monetary Fund on Monday increased its growth forecast for Spain in 2015 and 2016 to 3.1 percent and 2.5 percent from the 2.5 percent and 2 percent it forecast in April but warned the country against reversing unpopular reforms.

"A reversal of past reforms would create uncertainty and could stall the recovery, especially if the external environment were to deteriorate," the IMF said in a report at the end of an official visit to the country.

Some investors have fretted that Spain could cool the pace of its reforms after the country's ruling People's Party was punished at local elections last month.

While the PP got more votes than other parties, its spending cuts and reforms, along with corruption scandals, have helped boost new parties such as the anti-austerity party Podemos.

The IMF said Spain needed to make additional reforms since it was currently benefitting from lower oil prices, the depreciation of the euro and the European Central Bank's "supportive monetary policy".

"Vulnerabilities remain and deep structural problems persist, so additional efforts will be needed to sustain robust growth over the medium term."

As political parties broker pacts in Spain's regions after the elections and parties gear up for a general election by the end of the year, the IMF pressed the case for market-pleasing reform.

It said Spain needed to continue to reduce private debt, to take further measures to boost job creation and to continue to monitor the regional finance system.

Despite growing faster than the European Union average, Spain's economic crisis has left sky-high unemployment of about one in four workers.

The IMF recommended Spain introduce additional labour market reforms. "The cost of dismissing a permanent worker is still much higher than that for a temporary one, and this gap should be closed," it said.

It suggested considering a single contract based on years of service for sectors without high seasonal turnover and the reduction of legal uncertainties in the cases of collective dismissals.

It also suggested increasing excise duties and environmental levels and gradually ending reductions for some categories of products in value added tax (VAT) to "bring Spain's collective efforts more in line with those of other European countries".

"At the regional level, additional fiscal savings could be generated - for example, by reducing the costs of providing public health and education services and, as recommended by the Tax Reform Expert Committee last year, by increasing regions' responsibility to pay for these services," it said. (Reporting By Sarah Morris and Carlos Ruano; Editing by Jeremy Gaunt)

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