Spain must keep up reforms, IMF says

MADRID — Reforms in Spain have helped the economy rebound, the International Monetary Fund (IMF) said on Friday, but it warned more needed to be done to bring down high unemployment and correct other imbalances to boost long-term growth.

Spain must also keep trying to cut its deficit and not roll back existing reforms, the IMF said in its yearly country assessment for Spain. Those include a labour market shake-up  brought in by the current centre-right government, which made it easier to hire and fire staff.

The report comes before a general election expected around November, which is likely to result in a much more fragmented political landscape and spell a new, uncertain era of coalitions.

"We see the potential of doubt about what will happen to the reforms that are helping currently with the recovery in Spain as a key domestic risk," said Helge Berger, the IMF's mission chief for Spain.

The IMF expects Spain's economy to grow 3.1 per cent this year, below government forecasts for 3.3 per cent growth. It also projects the rebound will "fade out" to lower levels in the longer term.

Low global oil prices and a weaker euro have so far helped Spain, though their effects may dwindle. The country is also still vulnerable to aftershocks from any problems affecting debt-laden Greece, the IMF said.

Labour market reforms, lower wages and easing lending conditions after an overhaul of once-fragile banks have helped Spain's recovery after a prolonged downturn, the IMF added.

But over 5 million people are still unemployed and although jobs were now returning, too many were temporary or part-time, the IMF said. Such positions are usually less well paid than others.

Spain must try and fix this two-tier labour market, the IMF added, by closing the gap in dismissal costs for temporary and permanent hires for instance.

"Deep structural problems remain and vulnerabilities persist," the IMF said in the report. "As the recovery matures and tailwinds dissipate, growth is bound to decline to levels closer to Spain's still very low rate of potential growth of less than 1.5 per cent."

The IMF, which called on Spain to keep cutting public debt and better coordinate spending policies across its 17 autonomous regions, sees the country's deficit falling to 4.4 per cent of output this year. That is still higher than the 4.2 per cent Spain has agreed with Brussels.