(Updates with prior comments on review in fourth paragraph. For more on the euro crisis, see EXT4 <GO>.)

Dec. 19 (Bloomberg) -- The International Monetary Fund’s executive board approved a disbursement of 2.9 billion euros ($3.8 billion) to Portugal under a bailout package with the European Union.

The IMF completed the second review of Portugal’s performance under the economic aid program, the Washington-based lender said today in an e-mail.

Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of a 78 billion-euro aid plan from the European Union and IMF. As the country’s borrowing costs surged, Portugal followed Greece and Ireland in April in seeking a bailout and aims to return to bond markets in 2013.

Finance Minister Vitor Gaspar on Nov. 16 said the second quarterly review of the country’s financial-aid program was “successful,” allowing it to receive another rescue payment tranche of 8 billion euros. The so-called troika of the European Commission, European Central Bank and IMF said that day that Portugal’s plan is “off to a good start” and the 2012 budget includes “bold and welcome measures.”

The joint statement said the combined disbursements following the second review may occur in December and January.

The 2012 budget includes a plan to eliminate the summer and Christmas salary payments for state workers earning more than 1,100 euros a month. Tax deductions will be reduced and the government plans to increase the value-added tax rate on some goods. Spending cuts in 2012 represent 4.4 percent of gross domestic product, including reductions on health-care spending, while revenue increases represent 1.7 percent of GDP.

‘Stronger’ Measures

The country will face “stronger” budget measures in 2012 after a transfer of banks’ pension funds to the state allowed the government to meet this year’s deficit target, the European Commission said in a report dated Dec. 2. Portugal “rapidly” needs to adopt reforms to reduce labor costs and increase flexibility, the report said.

Portugal needs to improve control over expenditure and cut spending to meet its budget-deficit targets, the IMF said in a staff report about the first review of the country’s financial aid program released on Sept. 13.

The Portuguese government expects to narrow its budget deficit this year to 4.5 percent of GDP or less, helped by the transfer of banks’ pension funds to the state, Passos Coelho said on Dec. 13. “If we did not have extraordinary measures this year, our deficit would be very close to 8 percent,” he said.

Christmas Tax Surcharge

The value of the planned transfer of banks’ pension funds to the state may reach 6 billion euros, the Portuguese government said Dec. 2. The government has also announced a Christmas income-tax surcharge to help cover the shortfall this year.

The government had set an aim to trim the budget deficit from 9.8 percent of GDP in 2010 to 5.9 percent in 2011, 4.5 percent in 2012 and 3 percent in 2013, the EU ceiling. Debt will reach 100.8 percent of GDP this year and peak at 106.8 percent in 2013 before declining, the government forecast on Aug. 31. Debt was 93.3 percent of GDP in 2010.

Portugal’s economic expansion has averaged less than 1 percent a year for the past decade. The economy will shrink 3 percent next year, the European Commission forecast on Nov. 10. It would be one of only two euro-area countries to contract, the other being Greece with a 2.8 percent drop, according to the commission forecasts. The euro area is forecast to expand 0.5 percent.

The government forecasts that unemployment will rise to 13.4 percent in 2012 before it starts to decline in 2013.

--Editors: Gail DeGeorge, Scott Lanman

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net