Portugal's Finance Minister Vitor Gaspar.

Bailout recipient Portugal is making progress in its budget austerity and economic reforms even in the face of the European Union's recession, international lenders said Monday.

Lisbon's policies are “broadly on track, despite stronger headwinds. With much already accomplished, strong commitment and perseverance need to be maintained,” the European Commission, European Central Bank and International Monetary Fund said in a joint statement after a quarterly review.

Unable to borrow at sustainable rates in bond markets, Portugal agreed 18 months ago to painful fiscal austerity measures to bring its government deficit under control and to structural reforms to regain economic competitiveness, in return for a three-year lending programme of 78 billion euros (100 billion dollars), with two-thirds from the European Union and the rest from the IMF.

The so-called troika of lenders is expected to make the next instalment of 2.5 billion euros in January.

Portugal's budget and trade deficits continue to shrink, and greater banking reserves have reduced financial system risks, the report said. Decisive structural reforms to the economy “are proceeding apace.”

Not all indicators are positive, the troika found: “Rising unemployment, lower incomes, and uncertainty are weighing on confidence, while the recession in the euro area is beginning to bear on export dynamics.”

Given the depth of Portugal's financial and economic crisis, the current austerity and reform policy “adequately balances the need to adjust against the unavoidable costs of adjustment for economic activity and jobs,” according to the troika statement issued from IMF headquarters in Washington.

The conditions for Portugal's bailout include slashing its budget deficit to 3 per cent of gross domestic product by 2014. The economy is expected to shrink by 3 per cent this year, while unemployment has soared to nearly 16 per cent.

Portuguese Prime Minister Pedro Passos Coelho's conservative government has reformed the labour market, privatised state-owned companies, sharply cut spending and enacted massive tax hikes. Portugal's borrowing costs have eased ahead of a full return to bond markets next year.

“Fostering a more competitive economy remains imperative. The privatisation strategy is on track,” the troika said.

“In addition to strengthening active labor market policies, the authorities are committed to reducing severance pay to promote labour market flexibility and job creation. A comprehensive reform of the corporate income tax has been launched to foster investment and competitiveness.”

The troika said that real GDP was projected to contract by 1 per cent next year, with Portugal's long, deep recession coming to an end before the end of 2013 and a recovery of 0.8 per cent in 2014.

The Portuguese budget is on pace to reach deficit goals of 5 per cent of GDP this year and 4.5 per cent in 2013.

“Overall, the review confirms that solid progress is being made,” the troika statement said.

German Chancellor Angela Merkel said last week during a visit to Lisbon that she expected Portugal to need neither a second bailout nor renegotiation of the terms of its current rescue programme.

The 17-member eurozone is struggling against a years-long debt crisis, as one country after another faces credit downgrades and austerity moves.

Staff from the international lenders were in Lisbon from November 12 through Monday. - Sapa-dpa