IMF Executive Board Concludes the First Post-Program Monitoring with Ireland1Press Release No. 14/285
June 18, 2014
On June 13, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the First Post-Program Monitoring with Ireland.
Ireland’s economic recovery is broadening, with employment growing by 2.3 percent year-on-year in Q1 and industrial production and core retail sales rising 5.8 percent year-on-year and 3.3 percent year-on-year respectively in the first four months of 2014. Growth is projected at about 1.7 percent in 2014 firming to almost 2½ percent in 2015. Consistent with these economic developments, revenue performance in the first five months has been solid. The authorities have kept spending within aggregate ceilings despite pressures in the health sector, and the overall deficit remains on track to meet the 2014 budget target of 4.8 percent of GDP. Gross public debt is expected ease modestly to a still high 121.7 percent of GDP by end 2014.
Financial market conditions have further improved, with 10 year bond yields reaching a new all-time low of 2.4 percent, aided by recent ECB policy decisions and ratings upgrades. Market funding costs of Irish banks have also declined, supporting improved profitability, but credit to highly indebted households and Small- and Medium-size Enterprises (SME) continues to fall. Nonetheless, recovery of the residential and commercial property markets is continuing and spreading beyond Dublin. Recent quarters have also seen some decline in arrears on mortgages for primary dwellings. The Central Bank of Ireland recently announced further Mortgage Arrears Resolution Targets, with banks to conclude solutions for 45 percent of mortgages in arrears for over 90 days by end 2014. The authorities have also established the Ireland Strategic Investment Fund to finance commercial investments in support of growth and job creation.
Executive Board Assessment2
The Executive Directors welcomed signs that Ireland’s economic recovery is broadening amid favorable financial market conditions. At the same time, they note that still high unemployment, large public and private debts, and very high nonperforming loans in the banking sector pose a risk to the strength and durability of the recovery. Accordingly, Directors emphasized the need to maintain determined efforts to reduce vulnerabilities while promoting strong, broad-based growth.
Directors underscored the importance of steady fiscal adjustment to put the budget on a sound footing and debt on a firmly downward trajectory. They welcomed the authorities’ determination to adhere to the aggregate expenditure ceiling this year, while noting that additional consolidation should not be implemented if growth disappoints. Directors considered it appropriate to anchor next year’s budget plans on the quantum of adjustment rather than the headline deficit to protect hard-won credibility while avoiding procyclical policy responses to revisions in growth projections. Directors endorsed the goal to reach budget balance in the medium term and stressed the importance of identifying measures to achieve this goal in a growth-friendly manner that protects the most vulnerable.
Directors highlighted the need to maintain supervisory pressure on banks to durably resolve nonperforming loans and restore lending capacity. Stronger efforts should focus on a timely resolution of distressed mortgages and SME loans, and should be broadened to include impaired commercial real estate loans. Directors looked forward to the results of the ECB’s ongoing Comprehensive Assessment, and agreed that any identified capital needs should be addressed promptly. Should recourse to private capital prove insufficient, public support, including from a common euro area backstop, could be needed, and the possibility of direct recapitalization by the European Stability Mechanism should not be excluded.
Directors encouraged further efforts to help the long-term unemployed return to work by improving engagement with jobseekers and ensuring that training meets labor market needs. Noting that the recently established Ireland Strategic Investment Fund could support investment by addressing market financing gaps, Directors recommended careful management of its broad private investment role to contain fiscal risks.
1 The central objective of PPM is to provide for closer monitoring of the policies of members that have substantial Fund credit outstanding following the expiration of their arrangements. Under PPM, members undertake more frequent formal consultation with the Fund than is the case under surveillance, with a particular focus on macroeconomic and structural policies that have a bearing on external viability.
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm