Lisbon, December 19, 2012
Ms. Christine LagardeManaging DirectorInternational Monetary FundWashington, DC 20431Dear Ms. Lagarde:1.
The attached Memorandum of Economic and Financial Policies (MEFP) describes theprogress made in recent months towards the objectives laid out in our program supported by theExtended Arrangement. It also updates previous MEFPs and highlights the policy steps to be takenin the next months.2.
The end-September deficit and debt performance criteria were met and the two end-November structural benchmarks on the submission to Parliament of the new Code of CivilProcedure and the reform of the court organization were also met.3.
We remain strongly committed to the program’s policies and objectives and expect theagreed 5 percent deficit target for 2012 to be achieved. The 2013 budget was approved by theParliament, including a range of tax and spending measures that should ensure the generalgovernment deficit of 4½ percent of GDP will be achieved next year. To advance with the
that is required in coming years, we have initiated a comprehensive publicexpenditure review exercise to be completed early in 2013.4.
Consistent with our commitment to implement a multi-year strategic plan to strengthenfiscal discipline, we are intensifying our efforts to prevent the increase in the stock of existingdomestic arrears. We are reforming the SOE sector, which has been brought to overall operationalbalance, as per our commitment, after many years of chronic deficits. We will continue thisrestructuring effort, and to actively manage their high legacy debt burden. Moreover, theprivatization is proceeding as scheduled and we are advancing our strategy to put the PPPs on asustainable financial path.5.
Our policy efforts to preserve financial stability will continue, as banks are on track to meetthe 2012 capital requirements, following the recent capital exercise. Banco de Portugal (BdP)continues on its supervisory effort to ensure adequate recognition of impairment levels, asevidenced by the successful completion of the latest on-site inspection. In addition, therecapitalization and resolution framework will be further strengthened. The Portuguese authoritiesare preparing a proposal for the setting-up of a mechanism to securitize high-quality mortgagecredit with a supranational guarantee. Moreover, we are exploring a new proposal to rationalize andredirect to the most productive segments of the economy existing government initiatives, includingthe setting up of a revolving mechanism to leverage EU structural funds. Finally, we will also