LISBON (Reuters) - Portugal needs to keep up its reforms after it exits a bailout programme in May, to improve the economy's potential and shift it to sustainable export-led growth, the European Commission said on Thursday.
The recommendation was based on the last review of Portugal's performance under its international bailout It sought the rescue in 2011 as it got caught in a debt crisis that led to its worst economic downturn since the 1970s.
The commission said "programme implementation remains on track." Portugal's high debt-to-GDP level is "sustainable provided the reform momentum and fiscal adjustment is maintained beyond the programme horizon."
Portugal's economy resumed growing in the second quarter of last year and is expected to mark its first full year of growth since the crisis in 2014.
The commission said reforms need to continue to ensure future growth.
"The Portuguese government has already adopted a range of challenging structural reforms but, despite some early signs, their impact on the functioning of the economy will materialise only gradually," it said.
"The effective implementation of these reforms is crucial to rebalance the economy and boost its growth potential, and implementation progress must be continuously evaluated, including in areas which have been successfully completed under the programme such as the urban lease and judiciary reform."
Under the bailout, Portugal has carried out reforms in labour markets, the legal system and the public sector, including cutting public-sector pensions and salaries. It has also cut the number of public-sector workers.
"Employment in the public sector needs to be further streamlined, with appointments and remuneration strictly based on merit," the commission said.
The International Monetary Fund made similar observations earlier this week.
Portugal has been rewarded this year with falling bond yields as investors grow increasingly confident about its prospects after the bailout. It sold its first bonds at auction in three years at a record low yield.
Lisbon has yet to decide whether to exit the bailout with or without a precautionary credit line.
Reporting By Axel Bugge; Editing by Larry King