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1994-05-02
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<text>
<title>
Portugal: Economic Policy
</title>
<article>
<hdr>
Economic Policy and Trade Practices: Portugal
</hdr>
<body>
<p>1. General Policy Framework
</p>
<p> Despite virtual full employment and one of the European
Community (EC)'s highest growth rates in recent years (an
estimated 4.3 percent average from 1986 through 1991), the
Portuguese economy is still characterized by structural
imbalances and low general development. Labor productivity is
considerably lower than that of other EC countries, particularly
in the agricultural sector, and wide gaps separate upper
socio-economic groups from those at the bottom. Contrasts are
marked also between the more developed and industrialized
coastal regions and the rural hinterland, as well as between
modern and traditional economic sectors. The most important
manufacturing sector is textiles and apparel, responsible for
about one third of total manufacturing employment and about 30
percent of total Portuguese exports. The external trade of this
increasingly open economy is conducted mostly (about 74 percent)
with other EC member countries.
</p>
<p> Medium term economic policy has the objective of approaching
EC average development levels. Its principal goals are
modernization of the Portuguese economy and preparation for the
European economic and monetary union (and particularly for the
European Single Market of 1993), by increasing productivity and
external competitiveness, and by upgrading quality standards.
</p>
<p> The main macroeconomic problem is a high inflation rate
(which at 12 percent is triple the average of members of the
European Monetary System Exchange Rate Mechanism (ERM). Other
problems include: a chronic trade deficit (compensated by
substantial foreign capital inflows and emigrant remittances)
and a significant fiscal deficit.
</p>
<p> To cool the economy, overheated by demand and foreign
capital inflows, the Government has relied on a restrictive
monetary policy, while fiscal policy has tended to accommodate
inflation. The fiscal deficit is mainly due to public debt
interest repayments, a large bureaucracy, increased civil
service salaries, and infrastructure investments (mostly as
counterpart of EC financing). To date, monetary control measures
and commercial lending interest rates ten points above the
inflation rate have proved ineffective in bringing inflation
down to targeted figures.
</p>
<p> The combined effects of slower growth internationally and
the appreciation of the escudo, have led to a stagnation of
Portuguese exports in 1991. As a result, textiles and other
export oriented industries are experiencing increased
unemployment and in some cases actual bankruptcies. Prime
Minister Cavaco Silva's party won a renewed absolute majority
in the October 1991 general election. Although Cavaco Silva
reappointed most of his cabinet, many observers expect tighter
fiscal policy and a deepening of structural reforms as Portugal
prepares for increased integration with its EC partners.
</p>
<p>2. Exchange Rate Policies
</p>
<p> For many years the exchange rate policy was used as a means
to maintain export competitiveness. The policy was changed in
October 1990 in order to simulate the future entry of the escudo
in the ERM. The rate is now keyed to a basket of five major
European currencies. The Bank of Portugal (central bank)
repeatedly intervened on the exchange markets during the
September 1990 to August 1991 period to limit the appreciation
of the escudo against main European currencies to three percent.
</p>
<p> The timing of the entry of the escudo into the ERM has been
a key issue in economic policy debate. For the time being,
policymakers consider that the current inflation differential
vis-a-vis ERM member countries prevents such a move, because a
significant part of Portuguese industry would not survive
enhanced competition. This makes inflation reduction the highest
priority on the economic policy agenda.
</p>
<p>3. Structural Policies
</p>
<p> Portuguese economic structures are being liberalized in order
to modernize the country and to approach EC standards. A program
of privatization of State-owned industrial and financial firms
is being undertaken with the goal of reducing the size of the
public sector. The backward and decapitalized agricultural
sector, where markets have seldom played an important role, is
being submitted to important changes and challenges. Portuguese
agriculture is increasingly governed by EC Common Agricultural
Policy rules which has led to increased agricultural imports
from EC partners. EC structural funds are available for
investments by more progressive farmers.
</p>
<p> In order to help Portugal narrow its overall development lag
vis-a-vis other EC countries and reduce structural imbalances,
several major European Community assistance programs were
designed for Portuguese agriculture, industry, commerce,
regional development and education. These programs are financed
by EC structural funds and require significant Portuguese
counterpart funding. In 1991, EC structural funds totaled almost
two billion dollars or 1.8 percent of GDP.
</p>
<p>4. Debt Management Policies
</p>
<p> External debt is decreasing in both absolute and relative
terms. In 1985, outstanding external debt totaled almost 17
billion dollars or 80 percent of GDP. By June 1991, external
debt was reduced to slightly more than 15 billion dollars or
approximately 22 percent of GDP. Most of this is medium and
long term debt owed by the Government and public companies.
Government policy is to prepay as much external debt as possible
and transfer it to the domestic monetary market. Monetary
authorities have taken steps to discourage domestic companies
from utilizing external credits which are attractive due to much
lower interest rates. These measures have enjoyed limited
success.
</p>
<p>5. Significant Barriers to U.S. Exports
</p>
<p> As a result of Portuguese membership in the European
Community in 1986, the economy has experienced rapid
liberalization and restructuring. Under the terms of EC
accession, Portugal agreed to a seven-year transition period,
ending in December 1992, after which all barriers to trade,
capital flows, and labor mobility to EC partners are to be
eliminated. Portugal has only a few remaining quantitative
restrictions applied to the following products: articles of
rubber, paper and paperboard; special fabrics and nets; parts
of footwear; iron and steel tubes and pipes; weaving machines
and parts; and certain electrical goods such as fuses, plugs,
lampholders and switches. Import quotas also apply to
automobiles. Specific import levels are reviewed annually.
</p>
<p> Since the re-opening of the banking system to the private
sector in 1984, the Portuguese financial system has been rapidly
moving towards greater liberalization and deregulation. Several
foreign banks, including three U.S. banks, operate in Portugal.
For the most part, U.S. banks report that they receive national
treatment with their domestic competitors. In order to expand
an existing network, all banks must obtain prior Central Bank
approval and meet some negotiated requirements.
</p>
<p> Since 1985, the insurance business has been open to the
private sector and several local and foreign companies,
including three U.S. companies, share the market. State-owned
insurance firms are being privatized on a case-by-case basis.
</p>
<p> In transportation, a new law permits Portuguese companies to
compete with the state-owned airway company (TAP) on scheduled
international flights. Recent reforms also permit concessions
for private railway operation.
</p>
<p> Private participation is restricted or excluded in certain
sectors. These are: water, sewage, postal, main trunkline
telecommunication and harbors.
</p>
<p> The Portuguese Quality Institute (IPQ) establishes national
standards and implements EC directives. The National Laboratory
of Civil Engineering (LNEC) is responsible for construction
standards