Portugal: Staff Concluding Statement of the 2026 Article IV Mission

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments. The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

 Washington, DC – May 6, 2026

Portugal’s economy continued to register a strong performance in 2025: growth was higher than the euro area average, the fiscal balance was again in surplus, public debt continued its impressive decline, employment was strong, and inflation was contained. The 2026 Financial Sector Assessment Program (FSAP), the first in 20 years, found the financial system to be broadly resilient, and risks in the financial sector contained. Yet, structural challenges remain: living standards are still well below EU average, public debt is high, and fast-rising housing prices weigh heavily on households while creating risks for the financial sector. Moreover, significant risks, mostly from the turbulent external environment, blur the outlook and can pull growth down and push inflation further up. In this highly-uncertain context, economic policies must continue to strengthen the resilience of the economy while promoting higher growth.

• Fiscal policy should prioritize further reducing public debt to rebuild space to address shocks and lower vulnerability to market volatility, while increasing growth-enhancing public investment. This requires reducing current expenditure and tax exemptions, increasing public spending efficiency, and addressing aging-related pressures on the pension system and healthcare.
• In the short term, if there is further need to cushion the impact of higher energy import prices, support should target vulnerable households and struggling, yet viable, firms, and be limited in time. Across-the-board measures that mute price signals should be avoided.
• Further strengthening the financial policy framework, per the FSAP’s recommendations, will help preserve stability. Reducing imbalances in the real estate market and improving housing affordability primarily require removing housing supply bottlenecks.
• Measures to foster innovation and firm growth, streamline bureaucracy, boost investment in human skills, improve SMEs’ access to finance, and address labor market duality are needed to support higher potential growth and living standards. In addition to domestic reforms, this also requires reforms at the EU level, notably by deepening the single market, fostering the savings and investment union, and better integrating the energy market.

Outlook and Risks

IMF staff project moderate growth and higher inflation. Severe storms dampened growth early in 2026, but reconstructions and repairs are expected to subsequently boost activity, leaving the overall annual impact broadly neutral. However, negative spillovers from the war in the Middle East weigh on growth and increase inflation. Their impact on growth will be mitigated by higher inflows from the EU’s Recovery and Resilience Facility (RRF) funds. Overall, under IMF staff’s reference scenario, which assumes that the war is relatively short-lived, growth is projected broadly unchanged from 2025 at just below 2 percent. It is expected to slow to 1.7 percent in 2027, mostly due to the phase-out of RRF funds. Headline inflation is projected to rise above 3 percent in 2026, pushed by higher energy prices, before declining to 2.3 percent in 2027. Over the medium term, population aging, relatively low investment levels, and low productivity growth are expected to keep growth below 2 percent. Notwithstanding higher imports driven by elevated commodity prices, continued strong tourism inflows are expected to support a current account surplus over the medium term.

However, the outlook is subject to significant risks that could weaken growth and raise inflation further. A prolonged war in the Middle East could keep energy prices elevated for longer and heighten uncertainty, which would slow growth and further increase inflation. In an adverse scenario, in which the war lasts for most of 2026 and oil and gas prices are illustratively assumed to be $100/bbl and $24/MMBtu, IMF staff estimate that growth could be 0.2 percentage points lower and inflation 0.8 percentage points higher than in the reference scenario.[1] In a more severe scenario in which the war lasts through 2027, GDP growth could be lower than in the reference scenario by a cumulative 1.4 pp over 2026-27 and inflation higher by 1.1 pp and 2.7 pp in 2026 and 2027, respectively.[2] In both scenarios, tighter financial conditions associated with higher interest rates—as central banks respond to rising inflation—would contribute to further slow growth and hamper public debt reduction. In addition to risks related to the war in the Middle East, domestic labor shortages, climate change, and increased cyber threats constitute important structural risks. Also, wage pressures due to the tight labor market may lead to higher and more persistent inflation.

Fiscal Policy

The fiscal position is expected to be broadly balanced in 2026. The fiscal impact of storm-related spending, preliminarily estimated at about 0.3 percent of GDP, is expected to be partially compensated by the positive carryover from the higher-than-expected budget surplus in 2025. The net impact of the government’s response to the rise in fuel prices due to the war in the Middle East is estimated to be broadly neutral, as reductions of fuel excises are expected to be compensated by higher value-added tax (VAT) revenue. In total, the fiscal position should be close to the 2026 balanced budget target, possibly slightly lower depending on the final fiscal costs of the response to shocks.

The response to the energy shock should be carefully designed. While temporary and targeted support may be warranted, higher energy prices should continue to pass through to end users to preserve price signals and reduce demand. Thus, a broad-based tax (e.g., VAT) reduction should be avoided. The fuel excise tax reduction should be replaced by well-targeted support to lower-income households and struggling but viable firms in energy intensive sectors. Fiscal policy should also be calibrated to ensure that—together with ECB monetary policy—the overall policy mix limits the risk of second-round inflation effects. Thus, discretionary support measures would, in most cases, need to be offset. However, in case of a persistent recession, fiscal balances could be weakened temporarily. To strengthen resilience, the transition to renewable energy should be accelerated, supported by greater EU coordination to improve efficiency and reduce financing costs.

Over the medium term, entrenching fiscal sustainability while reorienting public spending toward growth-enhancing investment should be a priority. The government’s short and medium-term targets of broadly-balanced fiscal positions are appropriate to further reduce debt. However, according to IMF staff projections, achieving these targets in the face of spending pressures from aging, planned increases in defense spending, and the impact of recent and planned tax reductions, will require additional savings measures to close a growing gap that could otherwise appear after 2027 and exceed 1 percent of GDP by 2031. In addition, fiscal space needs to be created for higher public investment in infrastructure and human capital that is critical to enhance growth prospects.

Fiscal reforms should prioritize reducing tax expenditures, strengthening public investment management (PIM), and further reforming the pension and health systems. To maintain balanced fiscal positions and make room for higher investment, we recommend to:

• Simplify the tax system and scale back exemptions to raise revenue and improve efficiency. Numerous exemptions, reduced rates, and special regimes narrow tax bases and raise compliance costs—especially for small and medium enterprises (SMEs), weakening efficiency and fairness. Tax expenditures that no longer reflect a clear policy priority, are ineffective, or are too costly need to be abolished, as recently done for some inefficient R&D support. Where appropriate, they should be replaced with targeted transfers. VAT reduced rates and exemptions are not well targeted and often benefit higher-income households (e.g., reduced VAT on hotels and restaurants); they should be eliminated. Youth-specific personal income tax exemptions increase fiscal costs and are distortive without clear evidence of effectiveness in stemming youth emigration; reversing them is advisable. Finally, harmonizing size-contingent corporate income tax rates would eliminate a disincentive to firm growth.
• Strengthen PIM to reduce costs and increase the growth impact of public investment. Priority actions include linking medium-term investment and budget plans with clear multiyear funding commitments; strengthening project preparation, notably appraisal; streamlining project execution—including, as intended, procurement—and ensuring funding availability to speed up implementation; strengthening maintenance and asset management; and better integrating climate and disaster risks into infrastructure decisions.
• Curb fiscal pressures from aging-related spending. Over the medium and long term, Portugal’s pension and health outlays are projected to rise significantly, faster than the euro area average. To improve the sustainability, efficiency, and fairness of the pension system, reforms should simplify accrual and indexation rules, link early retirement age to the statutory retirement age, and reform survivor pensions. In health, to build on ongoing reforms, strengthening workforce management, containing pharmaceutical spending, improving patient flows across levels of care, and reinforcing budgeting, governance, and accountability will help further improve spending efficiency.

Financial Sector Policies

The 2026 FSAP found the banking sector resilient and the financial policy framework strong overall and identified several areas for further improvement. Systemic risks remain moderate. FSAP stress tests show that banks are resilient to adverse macro-financial conditions even under more severe shocks than past crises. The FSAP highlights the housing market as the main medium-term risk. Banks can absorb significant house-price declines, but vigilance is warranted given sizable real-estate exposures and price overvaluation. Also, exposures to sovereign debt are significant and fairly concentrated in EA countries, calling for close monitoring. The FSAP assesses the financial policy framework to be strong overall. It recommends further enhancing supervisory consistency and prioritization; developing specialist skills resource strategy; strengthening international cooperation and domestic data sharing for AML/CFT supervision; improving analytics and inter-agency coordination on cyber risk—a growing concern world-wide; implementing further legal, operational, and governance reforms to strengthen crisis preparedness; and strengthening budgetary independence and board appointment safeguards for securities markets and insurance and pension funds regulators.

Reducing real-estate market imbalances requires supply-side measures. Housing demand has risen sharply with demographic changes, higher incomes, and sustained foreign demand, while supply has lagged. The priority should be to facilitate the construction of new housing and incentivize owners of unoccupied buildings or short-term rentals to sell or long-term lease their properties. Meanwhile, support for low- to middle-income households should rely on targeted housing allowances and expanded availability of social housing. Measures to help young first-time buyers—such as public guarantees and tax exemptions—aim to improve affordability but are not means-tested, while they also boost demand and contribute to widening imbalances. The government’s program includes steps that could support supply. These include tax incentives for real-estate development and rental markets, although they come at the cost of higher tax expenditures; efforts to simplify and harmonize licensing and permitting, which should be accelerated; and reforms of spatial planning and land-conversion rules. Rebalancing property taxation from transaction to recurrent taxes would encourage mobility, while taxation of underused housing should be strictly enforced. Facilitating the enforcement of contracts is needed to improve the rental market.

The introduction of the positive neutral countercyclical capital buffer (CCyB) is welcome, while there is scope to strengthen the macroprudential toolkit further. The positive neutral CCyB at 0.75 percent became effective in January 2026. Together with the sectoral systemic risk buffer at 4 percent for household loans secured by housing properties, this brings the total releasable capital to 1 percent. As a next step, the FSAP recommends that BdP consider the range of releasable capital that may be needed to absorb losses during phases of the cycle when risks are elevated. The borrower-based measures (BBM) framework could also be strengthened by granting BdP enforcement powers to prevent potential compliance erosion.

Developing the broader financial system is a key priority to expand savings and investment channels. The underdeveloped capital markets and non-bank financial institutions sector limit household savings options, which are largely confined to low-paying bank deposits and real estate—thus fueling the housing affordability crisis. It also constrains corporate financing, particularly for young and fast-growing firms that depend on long-term risk capital to support innovation and growth. Advancing domestic capital market development and the EU savings and investment union should therefore be priorities.

Productivity and Growth-Enhancing Reforms

Reforms are needed to boost productivity growth—the key to bring Portugal’s living standards closer to euro area peers’. Weak productivity growth in Portugal reflects insufficient investment in both human and physical capital, compounded by a constraining business environment. This, in turn, limits firms’ innovation and growth and hampers Portugal’s integration into global value chains, reducing opportunities for technological upgrading and further widening the productivity gap. Streamlining bureaucracy, as prioritized by the government, and removing tax disincentives are needed from both the central and local governments. In addition to continuing progress in education, ongoing efforts to reduce labor market skill mismatches by aligning curricula more closely with evolving labor-market needs, and prepare for the rapid diffusion of AI are welcome. On the labor market, making open-ended contracts more flexible will incentivize their greater use, reduce labor market duality, and help improve the allocation of resources toward the most productive sectors or firms.

Deepening the European single market and advancing the savings and investment union will increase the Portuguese economy’s growth prospects and resilience. Removing remaining barriers to trade within the EU and harmonizing regulations and bankruptcy frameworks would give Portuguese firms easier access to a much larger market, thus providing buffers against the risk of further geo-fragmentation. Deeper integration in the EU energy market would also lower energy price volatility and strengthen energy security. In addition, improved access to finance, including venture capital, as the banking union is completed and savings and investment union progresses, would help firms invest and scale up.

The IMF team thanks the Portuguese authorities and other stakeholders for their hospitality, candid discussions, and collaboration.