October 24, 2012 / 10:54 PM / 7 years ago

IMF approves 1.5 billion euro disbursement to Portugal

WASHINGTON (Reuters) - The International Monetary Fund on Wednesday approved a 1.5 billion euro (1.2 billion pounds) loan disbursement to Portugal, confirming the country is on track with the terms of its 78 billion euro international bailout.

This marks the fifth disbursement for Portugal, aimed to help the indebted country return to finance itself in capital markets. The IMF approves new disbursements when it thinks a country is making good progress on the terms of a loan package.

Nemat Shafik, deputy managing director at the IMF, said Portugal’s austerity helped narrow its fiscal imbalance, but the country was not yet in the clear.

“A weaker external outlook and rising unemployment have increased risks to the attainment of (the) program’s objectives,” she said in a statement after the IMF’s board met to review Portugal’s progress.

“Additional efforts are necessary, with the support of euro-area partners, to further advance fiscal consolidation and boost long-term growth.”

Last month, the fund and the European Union agreed to give Portugal more time to meet deficit targets, as its economy is in the midst of its deepest recession since the 1970s. The IMF’s recent research has shown fiscal consolidation can hurt growth much more than previously thought.

But the IMF also urged Portugal to continue its tough budget adjustment, which involves the country’s largest tax hikes in modern history.

Portugal on Wednesday said tax revenues had fallen nearly 5 percent for the first nine months of the year, as the country wallows in recession.

The IMF commended Portugal’s newest fiscal targets, but said the euro-zone member should also consider cutting spending rather than relying on mostly tax hikes to tame the deficit. It urged Portugal to continue structural reforms, such as following commitment rules for spending, and keeping a rein on budgets at state-owned enterprises.

“With debt now set to peak at about 124 percent of (national income) in 2014, room for manoeuvre has diminished,” Shafik said.

Reporting by Lesley Wroughton and Anna Yukhananov; editing by Gary Crosse and Andrew Hay

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