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Portugal Macroeconomic Disequilibria and Public Debt
Between 1973 and 1988, the general government debt/GDP
ratio
quadrupled, reaching a peak of 74 percent in 1988. This
growth in
the absolute and relative debt was only partially
attributable to
the accumulation of government deficits. It also reflected
the
reorganization of various public funds and enterprises,
the
separation of their accounts from those of the government,
and
their fiscal consolidation. The rising trend of the
general
government debt/GDP ratio was reversed in 1989, as a surge
in tax
revenues linked to the tax reform and the shrinking public
enterprise deficits reduced the public sector borrowing
requirement (PSBR) relative to GDP. After falling to 67
percent
in 1990, the general government debt/GDP ratio was
expected to
continue to decline, reflecting fiscal restraint and
increased
proceeds from privatization.
The financing structure of the public deficits had
changed
since the mid-1980s under the effect of two factors.
First, the
easing of the PSBR and the government's determination to
reduce
the foreign debt/GDP ratio led to a sharp reduction in
borrowing
abroad. Second, since 1985 the share of nonmonetary
financing had
increased steeply, not only in the form of public issues
of
Treasury bills but also, since 1987-88, in the form of
medium-term Treasury bonds.
The magnitude of the public sector deficit (including
that of
the public enterprises) had a crowding-out effect on
private
investment. The nationalized banks were obliged by law to
increase their holding of government paper bearing
negative real
interest rates. This massive absorption of funds by the
public
sector was largely at the expense of private enterprises
whose
financing was often constrained by quantitative credit
controls.
Portugal's membership in the EC resulted in substantial
net
transfers averaging 1.5 percent of annual GDP during
1987-90. The
bulk of these transfers was "structural" funds that were
used for
infrastructure developments and professional training.
Additional
EC funds, also allocated through the public sector, were
designed
for the development of Portugal's agricultural and
industrial
sectors.
After 1985 the PSBR began to show a substantial
decline,
largely as a result of the improved financial position of
public
enterprises. Favorable exogenous factors (lower oil
prices, lower
interest rates, and depreciation of the dollar) helped to
moderate operating costs. More important, however, was the
shift
in government policy. Public enterprise managers were
given
greater autonomy with respect to investment, labor, and
product
pricing. Significantly, the combined deficit of the
nonfinancial
public enterprises fell to below 2 percent of GDP on
average in
1987-88 from 8 percent of GDP in 1985-86. In 1989 the
borrowing
requirements of those enterprises fell further to 1
percent of
GDP.
In April 1990, legislation concerning privatization was
enacted following an amendment to the constitution in June
1989
that provided the basis for complete (100 percent)
divestiture of
nationalized enterprises. Among the stated objectives of
privatization were to modernize economic units, increase
their
competitiveness, and contribute to sectoral restructuring;
to
reduce the role of the state in the economy; to contribute
to the
development of capital markets; and to widen the
participation of
Portuguese citizens in the ownership of enterprises,
giving
particular attention to the workers of the enterprises and
to
small shareholders.
The Portuguese government was concerned about the
strength of
foreign investment in privatizations and wanted to reserve
the
right to veto some transactions. But as a member of the
EC,
Portugal eventually would have to accept investment from
other
member countries on an equal footing with investment of
its
nationals. Significantly, government proceeds from
privatization
of nationalized enterprises would primarily be used to
reduce
public debt; and to the extent that profits would rise
after
privatization, tax revenues would expand. In 1991 proceeds
from
privatization were expected to amount to 2.5 percent of
GDP.
Data as of January 1993
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