IMF approves EUR 5.17 bn loan to Portugal

(WASHINGTON) - The International Monetary Fund said Wednesday Portugal was making "good progress" in its loan-supported economic program, clearing the way for a 5.17 billion euro ($6.79 billion) installment.

The money was made available after the IMF executive board completed a review of reforms that are part of a three-year 27.6 billion euro loan program established in May 2011.

"Good progress has been made on implementing policies under the program and early signs indicate that the required economic adjustment is taking place," said Nemat Shafik, IMF deputy managing director and acting board chair, said in a statement.

"Given the difficult external and internal environment, strong program implementation remains essential to ensure program success, rebuild market confidence, and restore growth," she added.

The IMF particularly called on the Portuguese authorities to remain firmly on track in efforts to reduce the nation's budget deficit.

"The fiscal consolidation strategy remains appropriate, with the deficit target for 2012 achievable under current policies and outlook," it said.

"In the event that downside risks to growth materialize, a case could be made to allow automatic stabilizers to operate, but changes to fiscal targets to accommodate policy-induced slippages should be avoided at all costs."

Including the latest tranche, the Washington-based global lender has provided 18.56 billion euros to Portugal, which last year joined Greece and Ireland in bailout programs funded by the IMF, the European Union and the European Central Bank.

The IMF loan approval came a day after the so-called "troika" of lenders concluded an audit of Portugal's progress in economic reforms and austerity measurers under their three-year, 78 billion euro package.

The lenders said Tuesday that Portugal could be strong enough to borrow on financial markets next year but is in a deeper recession than previously believed.

The economy is now set to shrink by 3.25 percent this year, they said, pointing to a worse recession than expected so far with contraction forecast to be 3.0 percent.

But the creditors commended the Portuguese government for having cut the budget deficit to 4.2 percent of gross domestic product, sharper than a 5.9 percent target.

There is a resurgence of concern on financial markets that Portugal is near a danger zone of possibly needing a second international bailout, and that Spain is also at risk of needing help.