Ireland—Concluding Statement of the First Post-Program Monitoring Discussion
May 2, 2014
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). 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, and as part of other staff reviews of economic developments.
An International Monetary Fund (IMF) mission visited Dublin from April 29 to May 2 for the first Post-Program Monitoring discussion—part of the IMF’s regular surveillance of countries with IMF credit outstanding above 200 percent of quota. The visit was coordinated with the European Commission's first Post-Programme Surveillance discussion. At the end of the visit, IMF Mission Chief Craig Beaumont thanked the Irish authorities for candid and constructive discussions, and issued the following statement:
1. The Irish economy is beginning its recovery from an exceptionally severe banking crisis. Banks have been stabilized and downsized. Substantial fiscal consolidation has been achieved. Importantly, Ireland has smoothly exited its EU-IMF supported program where the authorities built a track record of steadfast policy implementation. But significant economic challenges remain and determined efforts to address high levels of unemployment, public debt, and distressed loans must be maintained.
2. Strong job creation and a range of other indicators signal Ireland’s economic recovery is broadening. With almost all sectors creating jobs, employment growth reached 3.3 percent y/y in the fourth quarter of 2013. Consumer confidence and retail sales are rising and residential property market recovery is spreading beyond Dublin. Core investment, including construction, surged in the second half of 2013. Confirming these trends, tax revenues are off to a solid start in the first quarter of 2014. So, despite some volatility in recent GDP data, the mission expects economic growth of 1.7 percent in 2014 and about 2½ percent in 2015.
3. Financial market conditions have further improved yet lending remains weak. The Irish authorities have resumed regular bond auctions with borrowing costs reaching new lows. Banks’ declining bond yields are supporting their progress toward profitability. Market appetite for distressed Irish assets is evident in recent IBRC and NAMA transactions. However, modest new lending continued to be outweighed by the ongoing deleveraging of heavily indebted households and SMEs.
4. Overcoming the damage from the crisis will require strong and lasting job growth. Employment has risen 85,000 from its recent trough, but remains 260,000 below peak. Sustained job-rich recovery is therefore the highest economic priority, as set out in the government’s Medium-Term Economic Strategy 2014–2020. Achieving this goal while reducing risks to stability will require: (i) further declines in the fiscal deficit over time while shielding growth; (ii) reviving sound lending to underpin investment; and (iii) supporting the return of the long-term unemployed to work.
5. Finishing the job of putting the budget on a sound footing will help protect Ireland’s recovery. Substantial progress has been made in the last six years by turning a primary deficit of 10 percent of GDP (in structural terms) into an expected modest surplus this year. Even so, ensuring gross public debt—124 percent of GDP at end 2013 (98 percent on a net basis)—is on a firmly downward path, will require further declines in the fiscal deficit from its budgeted level of 4.8 percent of GDP in 2014. This should continue to be achieved in a phased manner:
- Strict adherence to the 2014 expenditure ceilings is vital. Overall expenditure is on track, yet persistent health spending pressures point to a need for further structural reforms. Proactive budget management will be needed to contain total spending within ceilings. Nonetheless, automatic stabilizers should be allowed to operate, resulting in a larger deficit if growth and revenues disappoint significantly and a smaller deficit if revenues outperform.
- The previously envisaged adjustment for 2015 remains appropriate. Budgetary measures on the order of 1¼ percent of GDP in 2015, as targeted since 2011, would safeguard hard won credibility. Anchoring on this adjustment avoids a procyclical reaction to revisions in growth projections, protecting economic recovery. This is also expected to deliver a deficit below the 3 percent of GDP ceiling under the Excessive Deficit Procedure on current projections.
- A balanced budget is a sound fiscal objective for the medium term. By putting Ireland’s debt burden firmly on a downward trajectory, this would reduce risks to sustained recovery. The authorities’ Stability Programme seeks budget balance by 2018 through a combination of holding total spending flat in euro terms and letting tax revenues rise in line with economic growth. Durable spending and revenue measures and reforms will need to be identified to achieve this goal in a growth friendly manner that protects the most vulnerable.
6. A sustained job-rich economic recovery hinges on reviving healthy lending. Investment is beginning to rebound from depressed levels, largely financed by retained earnings. In the medium term, however, a paucity of credit would impede the domestic demand revival which is critical for job creation. Hence, there is a need to continue improving the health of the banks. Expanded nonbank intermediation can also help provide finance and share risks, as indicated by recent REIT activity.
7. The recent successful disposal of IBRC loans represents a step change in the environment for financial sector restructuring. With some 90 percent of these assets sold to the private sector, the government’s contingent liabilities are notably reduced. Raising NAMA bond redemptions in 2014 will further reduce such liabilities, and it is appropriate for NAMA to preserve flexibility as it considers accelerating its disposals.
8. Resolving high nonperforming loans (NPLs) remains key to rebuilding banks’ lending capacity. An overhang of NPLs reduces banks’ profitability including through higher market funding costs. Strengthened provisioning and increased investor interest should facilitate a broadening of loan workouts:
- Durable mortgage resolution requires continued intensive efforts. Banks report they exceeded the CBI’s target to conclude sustainable solutions for 15 percent of mortgages in arrears at end 2013. The easing in residential mortgage arrears in late 2013 is a welcome first sign that household financial distress is being addressed. The aim should be to resolve a majority of arrears cases by year end while ensuring these solutions are lasting through audits and close supervisory engagement with banks. Recent personal insolvency and other legal reforms are supporting mortgage resolution progress, and the courts system should continue to be monitored to ensure that it is in a position to handle an increasing case load.
- Resolution of impaired commercial real estate (CRE) loans should be galvanized. A significant portion of banks’ NPLs are CRE loans that are not connected with other businesses, facilitating their resolution. Banking supervision should press for the restructuring or disposal of these NPLs as permitted by improved market conditions. Resolution of SME loans in difficulty needs to continue while ensuring the durability of these workouts.
9. The ECB’s ongoing comprehensive assessment is important to reinforce confidence in European banks including in Ireland. In common with all European banks subject to the assessment, any capital shortfalls, if identified, would need to be addressed in a timely manner. Private capital is the first line of recourse and it is welcome that market conditions for European bank equity issuance currently appear relatively favorable. Nonetheless, where private capital is insufficient, public support may be needed, including from a common euro area backstop to protect market confidence and financial stability; the possibility of ESM direct recapitalization should not be excluded. If the supervisory risk element of the assessment identifies other issues, such as profitability or liquidity, these should be addressed over time in a manner that contains costs while firmly safeguarding financial stability.
10. Maximizing job gains over time requires further strengthening of employment services and training, especially for the long-term unemployed. At 11.7 percent, unemployment is significantly reduced from 15 percent two years ago, yet some 61 percent of jobseekers have been out of work for more than a year. The Pathways to Work strategy is moving in the right direction but the intensity of engagement with the long-term unemployed remains low by international standards. The recent tender for private sector provision of employment services is therefore welcome, yet further redeployment of public sector staff is also needed. Timely implementation of the proposed Further Education and Training strategy is needed to better align training with employer needs. Active labor market programs should be rigorously evaluated in order to reallocate resources to those which are most effective.
11. Careful management of the Irish Strategic Investment Fund (ISIF) is critical. Redeploying the remaining 4 percent of GDP in National Pension Reserve Fund resources, the ISIF aims to support growth and jobs through commercial investments in Ireland, including in SMEs and infrastructure. The ISIF could help address market financing gaps, but moving to a broad private investment role entails major operational challenges. Ensuring commerciality through prudent scrutiny of project returns and substantial private co-funding is critical. The ISIF should not crowd out private financing or displace private projects. As part of managing risks to these public funds, detailed reporting on ISIF activities and performance is appropriate, and the continued need for the ISIF should be reviewed periodically.