September 5, 2012
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The Executive Board of the International Monetary Fund (IMF) today completed the seventh review of Ireland’s performance under an economic program supported by a three-year, SDR 19.47 billion (about €23.55 billion or about US$29.62 billion) arrangement under the Extended Fund Facility (EFF), or the equivalent of about 1,548 percent of Ireland’s IMF quota. The completion of the review enables the disbursement of an amount equivalent to SDR 0.76 billion (about €0.92 billion or about US$1.15 billion), bringing total disbursements under the EFF to SDR 15.79 billion (about €19.1 billion or about US$24.02 billion).
The Executive Board also completed today the 2012 Article IV Consultation with Ireland, which discusses economic policies from a medium-term perspective. The Article IV consultation occurs on an annual or biannual cycle for all IMF member countries, and this consultation is distinct from Ireland’s program supported by the EU and IMF.
The arrangement for Ireland, which was approved on December 16, 2010 (see Press Release No. 10/496), is part of a financing package amounting to €85 billion (about US$106.91 billion), also supported by the European Financial Stabilization Mechanism and European Financial Stability Facility, bilateral loans from Denmark, Sweden, and the United Kingdom, and Ireland’s own contributions.
Despite considerable headwinds from an adverse global economic outlook and the ongoing euro area crisis, the Irish authorities have pressed forward with implementing their economic program. All end-June 2012 performance criteria and indicative targets for the seventh review were met, and two structural benchmarks were observed, including a benchmark for end-September on the introduction of a fiscal responsibility bill to parliament.
The 2012 budget remains on track for the fiscal deficit target of 8.6 percent of GDP, despite a slowing in real GDP growth from 1.4 percent y/y in 2011 to a projected ½ percent in 2012 owing to weaker trading partner growth. In the year through July, the exchequer primary deficit was 0.7 percent of GDP below that in the corresponding period of 2011. Income tax, VAT, and corporation tax collections were ahead of expectations, yet this over performance was partly offset by higher health spending and unemployment benefits. The authorities have announced corrective measures for health spending.
Financial sector reforms have continued to advance, with the authorities submitting a restructuring plan for Permanent TSB to the European Commission, and they are preparing a roadmap to wean banks off the costly Eligible Liabilities Guarantee (ELG) scheme while preserving financial stability. The authorities introduced a personal insolvency bill to parliament at end June, and, at the Central Bank’s request, banks are preparing to roll out a set of loan modification options to address rising mortgage arrears.
On June 29, Euro Area leaders stated that the Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the country’s well-performing adjustment program. This positive signal helped the Irish government return to sovereign debt markets, by raising €4.2 billion of new funds in 5-year and 8-year bond financing in July, with the bulk of the issuance taken up by foreign investors. A further €1.0 billion in 15 to 35 year amortizing bonds was issued in August, tailored to meet domestic pension fund needs.
Following the Executive Board’s discussion, Mr. David Lipton, First Deputy Managing Director and Acting Chair, said:
“Half way through Ireland’s extended arrangement, the Irish authorities maintain strong ownership and implementation of their adjustment program. All program targets for end June have been met. Benefitting from the strengthened European support signaled at the euro area summit at end June, Irish bond yields have declined significantly in recent months, and the country regained access to sovereign bond markets in July.
“Nonetheless, the economic recovery is tentative and unemployment unacceptably high. Putting the financial sector into a position to support the recovery will require continuing efforts to return banks to profitability. Lowering funding costs by weaning banks off the costly Eligible Liability Guarantee scheme in an orderly manner is essential, as is reducing operational costs. The implementation of strategies to deal with mortgage arrears needs to continue to move ahead, so the CBI’s plans to monitor banks’ progress are welcome, and similar frameworks are needed for distressed credit to SMEs. To support these efforts, key issues for the effective operation of the new personal insolvency framework should be addressed in a timely manner.
“Sound budget management has continued in 2012 and the authorities should ensure the effectiveness of measures to contain health expenditure overruns. Yet significant further consolidation is necessary, so the fiscal responsibility bill and other enhancements of the budgetary framework are welcome. The 2013 budget should focus on high quality measures that are durable and equitable, and also provide greater clarity on measures to be adopted in later years.
“Ireland’s rapid return to market financing following the June 29 statement by euro area leaders confirms the benefits of steps to improve Ireland’s debt sustainability and break the vicious circle between the banks and the sovereign. Timely agreement on such steps, especially ESM investments in the equity of Irish banks, offers real prospects for Ireland to durably exit its reliance on official financing, benefiting Europe as well as Ireland,” Mr. Lipton said.
