Portugal clears first bailout inspection

AP News
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Posted: Aug 12, 2011 9:37 AM
Portugal clears first bailout inspection

Debt-laden Portugal got a passing grade Friday from international inspectors who made a first check on progress of reforms ordered in exchange for a euro78 billion ($112 billion) bailout in May. But they warned that the toughest problems remain to be tackled.

"In our assessment the program is on track," said a joint statement from the European Commission, the European Central Bank and the IMF. Review teams from the three have been in Lisbon since Aug. 1.

It said GDP growth and inflation for the year are expected to remain in line with forecasts made as part of the bailout program.

The team praised the government's drive to "redress recent slippages in expenditure controls during the first semester" and said it expects the deficit at year's end to be 5.9 percent of GDP, as programmed. It added that key to the program's success is opening the economy to competition. The next review is expected in November.

But Poul Thomsen of the IMF warned that "the most difficult challenges are still ahead of us."

He cautioned that if structural reforms of the economy aren't implemented, there is a risk that the program "becomes all about cutting and doesn't become enough about growth."

Portugal needs to open up its economy, rein in losses at publicly owned companies and cut social contributions to allow employment to increase, Thomsen said.

"This is certainly an area where the governments resolve and determination will be tested in the coming months," he added.

Earlier Friday the government said it was increasing VAT sales tax on electricity and natural gas and freezing future wage increases for some civil servants.

The measures are due to come into effect in September and will halt a planned wage increase at the defense and public administration ministries, Finance Minister Vitor Gaspar said.

Portugal joined Greece and Ireland in taking a bailout after investors, nervous about the country's high debt burden, began charging unbearably high interest rates on loans.

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Gabriele Steinhauser contributed to this story from Brussels, and Daniel Woolls and Harold Heckle from Madrid.