The IMF warned that risks to Portugal’s rescue programmehave climbed significantly as Lisbon fights to curb a stubborn deficit andstreet protests mount.
Portugal had made “good progress” after securing a78-billion-euro ($100-billion) International Monetary Fund-European Unionbailout in May 2011, IMF staff said in a progress report.
“But after a strong start, the programme has entered a morechallenging phase,” they said.
“Risks to the attainment of the programme's objectives haveincreased markedly,” said the review, released a day after the Fund unlocked a1.5-billion-euro installment from the bailout.
Portugal now had a large and “durable” public deficit, itsaid, blaming a drop in tax income as Lisbon’s economy relied more on exportsrather than domestic demand.
“And, politically, the broad-based consensus that hasbuttressed the programme to date is being tested,” it added. "Social andpolitical resistance to adjustment has heightened."
Tens of thousands of Portuguese have spilled into thestreets in past weeks to protest the painful spending cuts and tax increases.
The unions have also called a new general strike forNovember 14, coinciding with similar action elsewhere in the eurozone includingin struggling neighbour Spain.
A recent opinion poll showed that about 70 percent of peopleare now hostile to the austerity policies.
Under a draft budget presented last week to find 5.3 billioneuros in savings, a range of taxes are to be raised, and the basic rate ofincome tax will go up from 9.8 percent this year to 13.2 percent in 2013.
Partly as a result, Portugal's government and the IMF agreethat output will shrink by 1.0 percent in 2013 after contracting by more than3.0 percent this year.
Slowing eurozone economies and Portugal's austerity measureswere combining to brake activity, said an assessment by IMF staff, pushing upunemployment, which is forecast to near 16 percent at the end of this year.
"An improvement in the broader euro area economicenvironment will be critical to the programme's success," the IMF warned.
Public debt would peak at 124 percent of gross domesticproduct next year, it forecast.
IMF staff said that the so-called troika of the IMF,European Union and European Central Bank, which are overseeing the bailout, hadalready agreed to relax Portugal's deficit-cutting targets.
Under the new regime, Portugal must curb the public deficitto 5.0 percent of GDP rather than 4.5 percent in 2012, to 4.5 percent insteadof 3.0 percent in 2013 and then to 2.5 percent in 2014.
The IMF said the targets were relaxed in part because itrecognised that the impact of deficit-cutting measures on the economy wasgreater than originally believed.
The Fund had previously calculated that deficit-cuttingmeasures would have a "multiplier" effect of 0.5 percent on economicgrowth, meaning that a one percentage point cut in the deficit would sloweconomic growth by a half a percentage point.
But, as the IMF admitted in Tokyo meetings this month, theactual impact of austerity measures on the economy has proven to be larger thanearlier believed.
IMF staff and the Portuguese authorities had now agreed toapply a new multiplier of 0.8 percent for austerity measures in 2013, leadingto the lower estimates of economic activity next year.
