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### HEALTHY DEMAND-DRIVEN GROWTH — Growth, labor, prices, and external sector
- Growth and domestic demand:
  - In the first three quarters of 2016, output expanded by 4.8 percent y/y.
  - Stripping out volatile intellectual property investment and airplane leasing (“core demand”), growth is estimated at about 3 percent y/y.
  - Private consumption grew by 2.8 percent y/y.
  - Investment, excluding the most volatile components, increased by almost 10 percent, driven by a pickup in building and construction.
  - The growth contribution of net exports was marginally negative.
- Brexit and near-term sentiment:
  - Fallout from the UK vote to leave the EU appears relatively mild to date, though sentiment indicators softened.
  - Bond yields and CDS spreads widened briefly after the vote but then returned to a downward trend; stock prices partially recovered while bank share prices remained depressed.
  - Markets unsettled after the US Presidential election led to a temporary uptick in Irish bond spread.
- Labor market and inflation:
  - Unemployment rate fell to 7.2 percent in December 2016 from 8.9 percent at end-2015.
  - Net migration turned positive for the first time since 2009; labor force participation edged up.
  - Headline inflation hovered in negative territory during most of 2016; core inflation averaged about ½ percent, driven by services prices.
- Public finances (2016):
  - In 2016H1, the headline general government deficit almost halved to 1 percent of GDP compared to the same period a year ago.
  - Staff estimates the headline general government budget deficit at 0.9 percent of GDP in 2016.
  - Gross general government debt is estimated to decline to 76.4 percent of GDP in 2016 from 78.7 percent of GDP in 2015.
  - Revenue rose by 3.4 percent y/y in 2016H1, mainly due to higher-than-expected corporate income tax intake; within-year expenditure increases, mainly in the health sector, absorbed most of the tax over-performance.
- Credit, debt, and balance-sheet developments:
  - Banks’ credit to the non-financial private sector contracted by almost 6.5 percent y/y in November 2016.
  - Household debt declined to about 161 percent of gross disposable income in Q2 2016 from an average of about 170 percent in 2015.
  - Corporate-sector debt registered an upward level shift in 2015 to about 267 percent of GDP from 219 percent of GDP in 2014, driven by corporate restructuring by large multinationals.
- Property markets and housing policy:
  - House price increases accelerated to 7.1 percent y/y in October 2016.
  - The value of mortgage approvals surged by 43 percent as of November compared to a year earlier.
  - Residential rents rose sharply and have exceeded their pre-crisis peak.
  - Government introduced rental growth caps of 4 percent in Rent Pressure Zones (RPZ) starting in 2017.
  - Government introduced a multi-pronged Housing Action Plan in July to be implemented over 2017-21 (Annex II).
- External sector:
  - The large current account surplus increased in the first three quarters of 2016, mainly due to a narrower primary income deficit.
  - Exports associated with contract manufacturing decelerated; underlying exports remained strong.
  - Gross external debt declined due to lower external liabilities of the general government and monetary financial institutions.

### THE OUTLOOK IS FAVORABLE — Baseline forecast, composition, and risks
- Baseline forecast and composition:
  - Staff estimates real GDP growth at 4½ percent in 2016, 0.4 percentage point lower than expected at the time of the July Article IV.
  - A growth slowdown to 3.2 percent continues to be forecast in 2017.
  - Over the medium term, growth is projected to decelerate gradually to just below 3 percent.
  - Employment is expected to grow broadly in line with core domestic activity, bringing down the unemployment rate to around 6½ percent by the end of the forecast period.
  - Headline inflation is projected to edge up next year and gradually converge towards 2 percent over the medium-term.
  - Trade and current account balances will remain in surplus, though narrowing.
- Risks and forecast uncertainty:
  - Quarterly data show some volatility; uncertainty surrounding the forecasts is particularly elevated following the 2015 national accounts revision.

### CAPACITY TO REPAY IS STRONG, DESPITE SUBSTANTIAL DOWNSIDE RISKS — Financing, risks, and mitigating factors
- Financing position and liquidity (selected 2016–early 2017 operations):
  - In 2016, the National Treasury Management Agency (NTMA) raised €8.4 billion in long-term bonds, including the issuance of Ireland’s first 100-year note at a weighted average yield of 0.8 percent.
  - As of end-2016, the Exchequer’s cash balance stood at €8.4 billion, which rises to €8.6 billion if other liquid financial assets are added.
  - This liquidity buffer is equivalent to about two-times the outstanding obligations to the Fund, and covers about 6 months of average annual financing needs over 2017–22.
  - ECB secondary market purchases in Irish paper are about €1 billion a month (broadly equivalent to staff estimates of average monthly gross financing needs in 2017).
  - On January 4, 2017, the NTMA raised €4 billion through a new 20-year benchmark bond.
- Downside risk assessment — key risks:
  - Brexit: introduces significant risk and uncertainty due to important trade and financial linkages with the UK; particularly relevant for agri-food, clothing and footwear, and tourism sectors; could create a significant drag on euro area growth with second-round effects on Ireland; possible relocation of EU-oriented firms from the UK to Ireland represents a potential upside, but output effects are likely relatively limited.
  - Political context: a challenging political environment and adjustment fatigue may complicate policymaking for the new minority government; the border with Northern Ireland has returned as a central issue in the context of Brexit.
  - Taxation issues: the EC ruling on Apple Inc., implementation of OECD BEPS, the EC proposal to relaunch CCCTB, and potential changes to U.S. corporate income taxes could affect Ireland given the strong presence of US-based multinationals.
- Box 1 — International Taxation Issues (summary):
  - EC State-Aid Ruling:
    - On August 30, the EC issued a ruling that Ireland granted up to €13 billion (equivalent to almost 5 percent of GDP) in illegal state aid to Apple Inc. in the form of unjustified tax benefits over 2003-14.
    - Ireland was required to recover this amount, plus interest, from Apple. The Irish government has appealed; money recovered to be kept in an escrow account pending legal proceedings.
    - The government appointed an independent expert to review Ireland’s corporation tax code, expected by mid-2017.
  - OECD BEPS: over 100 jurisdictions collaborate; agreement on key principles reached in 2015; implementation underway.
  - CCCTB: EC proposal relaunch in October proposing a two-stage process mandatory for multinational groups with global revenues exceeding €750 million a year; first stage establishes a common base; second stage consolidates profits and losses within the EU and establishes an apportionment formula; proposal does not cover tax rates.

- Mitigating factors for repayment capacity:
  - Government commitment to a prudent budgetary strategy; contingent fiscal risks from the financial sector have declined substantially.
  - Staff projection: sound fiscal performance is projected to bring gross public debt close to 60 percent of GDP by 2022.
  - Gross financing needs for the 2021–23 period—when the remaining liabilities to the IMF fall due—are described as relatively modest.
  - Funding strategy has significantly smoothed medium-term gross financing requirements; projected hump in 2020 likely to be dealt with well in advance through debt management operations.
  - Ireland has regained strong market access, demonstrated by one of the longest average debt maturities among EU countries and a constantly high bid-to-cover ratio.
  - Potential additional resources for debt reduction not incorporated into current projections: privatization proceeds and a settlement of the EC ruling on Apple Inc.
- Indicators of Fund credit (selected figures for 2017–23):
  - Obligations to the Fund (in percent of quota): 3/1.4, 1.4, 1.4, 1.4, 69.3, 31.5, 10.2 (2017–2023 as presented).
  - Obligations to the Fund (in percent of GDP): 0.0, 0.0, 0.0, 0.0, 0.9, 0.4, 0.1.
  - Obligations to the Fund (in percent of exports of goods and services): 0.0, 0.0, 0.0, 0.0, 0.7, 0.3, 0.1.
  - Obligations to the Fund (in percent of government revenue): 0.1, 0.1, 0.1, 0.1, 3.5, 1.5, 0.5.

### AUTHORITIES’ VIEWS, BREXIT SCENARIOS, AND FISCAL RULES
- Authorities’ views and Brexit risks:
  - Authorities broadly concur with staff on outlook and direction of risks; project continued healthy growth supported by domestic demand and recovery in net exports despite modest slowdown.
  - Agreed main risks: external factors (including Brexit-related uncertainty), sustained slow-growth in main trading partners, external political uncertainties.
  - Noted risks: high concentration of value-added and fiscal revenues in a small number of companies (largely multinational corporates); uncertainty from international tax developments.
  - Authorities agree capacity to repay the Fund remains strong.
- Box 2 — Authorities’ estimates of Brexit impact:
  - Initial “rule of thumb”: a 1 percent reduction in UK GDP would reduce Irish GDP level by about 0.2–0.3 percent, relative to baseline, over two years.
  - Department of Finance/ESRI adverse scenario: if UK tariffs to the EU return to most-favored-nation status under WTO rules, level of Irish output could decline up to 3¾ percent in the long term (beyond the 0.5 percent of GDP reduction in 2017 incorporated into the Summer Economic Statement).
    - This estimate reflects a decline of about 30 percent in exports to the UK and 4 percent in total exports.
    - Under this scenario, the unemployment rate could increase by up to two percentage points overall in the long run.
  - Studies point to important variations in exposure across sectors and regions, with traditional sectors most exposed.

### FISCAL POLICY — 2017 budget, medium-term framework, and staff assessment
- 2017 budget targets and staff projections:
  - 2017 government target: headline deficit of 0.4 percent of GDP, an improvement of 0.5 percent of GDP versus the likely outturn for 2016.
  - Given a positive output gap, authorities’ framework assumes a structural adjustment of about 0.8 percent of GDP in 2017.
  - Staff projects overall adjustment 0.4 percent of GDP and structural adjustment 0.5 percent of GDP for 2017.
  - Government medium-term objective (MTO): structural deficit of 0.5 percent of GDP in 2018 and counter-cyclical stance thereafter; estimated positive overall structural balance of about 1 percent of GDP by 2021.
  - Government intends to establish a contingency reserve (“rainy-day” fund) by allocating €1 billion of available space from 2019 onwards.
  - Government announced aim to reduce debt-to-GDP ratio to 45 percent within a decade; staff projects these targets are achievable based on announced policies but notes staff baseline foresees slower deficit reduction in outer years.
- Fiscal projections (selected figures, 2016–21):
  - Department of Finance projections — Growth: 4.2, 3.5, 3.8, 3.6, 3.0, 2.8 (2016–2021).
  - Department of Finance projections — Public debt 1/: 76.0, 74.3, 72.7, 70.2, 65.8, 63.0.
  - Staff projections — Growth: 4.6, 3.2, 3.2, 3.0, 2.9, 2.8 (2016–2021).
  - Staff projections — Public debt 1/: 76.4, 75.0, 73.6, 71.5, 67.2, 64.8.
  - Note: 1/ Taking into account the accumulation of a Rainy Day Fund of €1 billion starting in 2019.
- Staff assessment of fiscal stance:
  - Views government overall fiscal targets as broadly appropriate given substantial risks.
  - Emphasizes need to maintain steady progress in restoring fiscal buffers; public debt and interest payments remain elevated, particularly when expressed in terms of general government revenue.
  - Highlights vulnerability to external shocks and revenue volatility due to multinational operations; CIT proceeds are highly concentrated, with ten mainly multinational companies accounting for about 40 percent of the tax intake.
  - Advises against using potentially temporary revenue gains to fund permanent expenditure increases or tax cuts; welcomes government ambition to reduce debt-to-GDP ratio within the coming decade.
- 2017 fiscal measures (distribution and totals):
  - Overall estimated cost: about €1.3 billion (½ percent of GDP), distributed between spending increases and tax cuts on a 3 to 1 basis.
  - Revenue-reducing measures (selected, as presented, minus denotes deficit-increasing):  
    - Reduction of the three lowest Universal Social Contribution (USC) rates by 0.5 percent: -309 (€ millions) (-0.1 percent of GDP).  
    - Help-to-Buy Scheme: -335 (€ millions) (-0.1 percent of GDP).  
    - A €100 increase in the Home Carer Tax Credit (from €1,000 to €1,100): -500.0 (€ millions).  
    - A €400 increase in the Earned Income Credit for self-employed (from €550 to €950): -70.0 (€ millions).  
    - Increase by 50 cents per cigarette pack: -330.0 (€ millions).  
    - Increase in threshold for gifts and inheritance from €280,000 to €310,000: 650.0 (€ millions).  
    - Tax compliance measures: -220.0 (€ millions).  
    - Other revenue measures: 1300.0 (€ millions).  
    - Total revenue measures listed: -570.0 (€ millions) in the table context; overall total measures: -1,340 (€ millions) (-0.5 percent of GDP).
  - Expenditure side (selected):  
    - Health: -266 (€ millions) (-0.1 percent of GDP).  
    - Housing: -257 (€ millions) (-0.1 percent of GDP).  
    - Education: -170 (€ millions) (-0.1 percent of GDP).  
    - Social protection: -178 (€ millions) (-0.1 percent of GDP).  
    - Childcare: -850.0 (€ millions).  
    - Other expenditure measures: -750.0 (€ millions).
- Policy priorities and recommendations (selected):
  - Strengthen investment spending: increase well-targeted capital expenditure; consider redirecting savings from improved current spending efficiency to capital investment within the tight expenditure envelope.
  - Mitigate housing market imbalances: support expanding and expediting housing and rental delivery under the Housing Action Plan; review Help-to-Buy scheme to improve targeting; consider fast-tracking locally levied vacant lot tax (expected in 2018).
  - Reform personal income taxation: caution on phasing out USC over five years; consider merging USC into a broader income tax with lower rates for below-median wage earners and offsetting costs by reducing number of reduced/zero VAT products and scaling up property tax.
  - Address expenditure pressures: any expenditure increases beyond programmed plans would need offsetting tax increases or spending cuts to meet deficit targets.

### BANKS, NPLs, MACROPRUDENTIAL FRAMEWORK — Balance-sheet repair, indicators, and recommendations
- Balance sheet repair and remaining risks:
  - Bank profitability has recovered somewhat due to higher net interest margins and improved asset quality, but remains relatively low, particularly when provision write-backs are excluded.
  - UK accounts for about 20 percent of domestic banks’ aggregate revenues.
  - Permanent TSB completed its €8.4 billion deleveraging plan; reported to involve a 15 percent haircut on the £2.29 billion face value of the Capital Home Loans portfolio.
  - Legislative proposal on variable rate mortgages reportedly heightened investor uncertainty; staff warns undue interference could undermine competition and prospects to narrow the mortgage rate spread.
- Irish banks — key financial indicators (selected, percent or point values as presented for 2012–2016/Q3):
  - Credit growth (2012–2016Q3): -10.2, -10.8, -4.3, -8.6, -5.3.
  - Return on assets: -2.0, -0.8, 0.6, 0.7, 1.0.
  - Pre-provision profits 2/: -0.2, 0.4, 0.5, 0.7, 0.6.
  - Net interest margin: 0.8, 1.2, 1.6, 1.8, 1.9.
  - Cost-to-income ratio: 166.0, 72.7, 64.1, 62.5, 58.2.
  - NPL ratio: 24.8, 27.1, 23.2, 16.1, 14.2.
  - Coverage ratio: 48.5, 51.4, 51.7, 51.8, 52.0.
  - Texas ratio 3/: 115.0, 120.0, 106.0, 93.4, 79.7.
  - CT1 ratio: 14.7, 13.3, 15.5, 14.9, 15.0.
  - Net loan to deposit: 124.0, 111.0, 108.0, 106.0, 105.4.
  - Net stable funding ratio: 82.3, 96.1, 110.5, 112.9, 116.0.
  - Liquidity coverage ratio: 92.3, 107.7, 109.9, 107.8, 118.7.
  - 1/ Indicators cover the three main domestic banks: Allied Irish Banks, Bank of Ireland, and Permanent TSB. Figures are based on Q4 data.
  - 2/ Based on quarterly data and excluding nonrecurrent items, as a share of average total assets.
  - 3/ NPLs to sum of provision stock and CT1 capital.
- Distressed loan resolution and NPL trends:
  - Nonperforming loans (NPLs) of domestic banks declined to 14.2 percent in 2016Q3 from 16.1 percent in 2015Q4.
  - Distressed mortgages account for around 50 percent of banks’ nonperforming book.
  - Deep arrears segment defined as 720 days and above; resolution in this segment remains slow owing to lengthy legal proceedings and weak creditor-borrower engagement.
  - Significant headway made in resolving distressed SMEs and CRE loans; mortgage resolution slower, especially in deep arrears.
  - State-funded “Advice-and-Arrears” scheme provides free legal and financial advice for owner-occupied properties and has showed promise.
  - Government plans include establishing a special court to handle mortgage arrears and other personal insolvency matters.
- Macroprudential framework and credit registry:
  - The macroprudential measures introduced in 2015 play an important role in strengthening banks and household resilience.
  - Central Bank modified several parameters (e.g., extension of the valuation period to four months from two months; exclusion of commercial landlords and developers) coming into force from January 1, 2017.
  - The Central Credit Register (CCR) is expected to become operational in early 2018 (first phase) and the second phase covering businesses expected in late-2018; lenders’ capacity to deliver adequate data within timelines is an important dependency.
  - Full CCR implementation will support conversion of the current Loan-to-Income (LTI) limit into a Debt-to-Income (DTI) limit.
- Central Bank’s mortgage-market calibration (selected):
  - LTV limits for primary dwelling homes (changes described for January 1, 2017): First time buyers: 90 percent limit with 5 percent of all new lending allowed above limits; Second and subsequent buyers: 80 percent limit with 20 percent of all new lending allowed above limits.
  - Buy-to-let: 70 percent limit; 10 percent of all new lending allowed above limits.
  - LTI limit for primary dwelling homes: 3.5 times; 20 percent of all new lending allowed above limits.
- Staff recommendations:
  - Intensify supervisory oversight of NPL resolution and ensure prolonged mortgage arrears are tackled through loan restructuring where feasible.
  - Continue Advice-and-Arrears scheme and make legal proceedings more efficient.
  - Continue CCR implementation and recalibrate macroprudential measures to support prudent lending and conversion from LTI to DTI once CCR is fully operational.

### MACROECONOMIC PROJECTIONS, FINANCIAL SECTOR INDICATORS, AND SELECTED TABLES (selected series)
- Major macroeconomic projections and dynamics (selected, annual/period series where presented):
  - Real GDP (annual percentage change, 2014–2022): 8.4, 2.6, 3.4, 4.6, 3.2, 3.2, 3.0, 2.9, 2.8.
  - Domestic demand (annual percentage change, 2014–2022): 7.7, 9.9, 6.8, 3.4, 3.4, 3.2, 3.0, 2.9, 2.9.
  - Inflation (HICP, annual percentage change, 2014–2022): 0.3, 0.0, -0.2, 0.8, 1.4, 1.6, 1.7, 1.9, 1.9.
  - Unemployment rate (percent, 2014–2022): 11.3, 9.5, 7.9, 7.1, 6.9, 6.6, 6.6, 6.6, 6.5.
  - General government gross debt (percent of GDP, 2014–2022): 105.4, 78.7, 76.4, 75.0, 73.6, 71.5, 67.2, 64.8, 60.9.
  - Current account balance (percent of GDP, Table 3, 2014–2022): 3.2, 26.2, 20.8, 16.6, 16.3, 15.6, 14.9, 14.7, 15.0.
  - Trade balance (billions of euros, Table 3, 2014–2022): 40.7, 110.6, 110.3, 116.2, 121.3, 125.9, 130.1, 134.2, 138.6.
  - Exports of goods (billions of euros, 2014–2022): 114.5, 195.6, 193.9, 204.4, 214.5, 224.0, 233.2, 242.4, 252.2.
  - Imports of goods (billions of euros, 2014–2022): -73.7, -85.0, -83.5, -88.2, -93.2, -98.1, -103.1, -108.2, -113.6.

### ANNEX I — National Accounts Revision (summary and implications)
- Revision summary and drivers:
  - In July 2016, Ireland’s Central Statistics Office (CSO) revised substantially the national accounts for 2015, mainly due to corporate restructuring operations of a small number of multinational companies, including the relocation to Ireland of companies’ entire balance sheets and the shift of assets to Irish subsidiaries.
  - As a result, the GDP growth rate was upgraded from 7.8 percent to 26.3 percent.
  - On the supply side, the revision was due to a level shift in the stock of capital assets (mainly intellectual property).
  - On the demand side, Ireland’s net exports were substantially revised upward, reflecting an increase in “contract manufacturing” and lower payment of royalties due to the on-shoring of intellectual property.
  - The CSO estimates that in 2015: the output of foreign-owned multinational enterprises (MNE) grew by 101 percent, and the non-MNE dominated sectors of the Irish economy increased by 4.4 percent over the same period.
- Scale and concentration of multinational activity:
  - In 2015, foreign-owned multinational enterprises accounted for almost 40 percent of Ireland’s gross value added at constant 2014 basic prices.
  - A very significant amount of activity carried out in other countries is now recorded in Ireland’s national accounts.
- Statistical and policy implications:
  - Headline GDP and GNP figures no longer provide an effective measure of economic activity that physically takes place in the national territory, complicating measurement of the domestic economy.
  - Headline GDP may become more volatile, together with the tax base, as investment in intellectual property may easily move across jurisdictions.
  - Productivity as well as potential output and the output gap are more difficult to estimate.
  - Traditional fiscal metrics, usually expressed in percent of nominal GDP, need to be assessed carefully (for example, although the debt-to-GDP ratio fell 15 percentage points based on the change of methodology, the economy’s capacity to sustain its debt has not changed).
- Measurement responses and institutional arrangements:
  - The CSO convened a high-level Economic Statistics Review Group chaired by the Governor of the Central Bank of Ireland with Eurostat and the IMF as international observers; the Group’s findings expected to be communicated in early 2017.
- Definition note:
  - “Contract manufacturing” refers to a special form of outsourcing where an Irish company engages a company abroad to manufacture products on its behalf but retains the economic ownership of the inputs; exports recorded in Irish national accounts even though goods were never physically present in Ireland.

*International Monetary Fund staff report excerpt (Ireland, 2016).*

### 2016. The staff team comprised Michele Shannon (head), Alessandro

### HEALTHY DEMAND-DRIVEN GROWTH

### Growth and domestic demand
- In the first three quarters of 2016, output expanded by 4.8 percent y/y.
- Stripping out volatile intellectual property investment and airplane leasing (“core demand”), growth is estimated at about 3 percent y/y.
- Private consumption grew by 2.8 percent y/y.
- Investment, excluding the most volatile components, increased by almost 10 percent, driven by a pickup in building and construction.
- The growth contribution of net exports was marginally negative.

### Brexit and near-term sentiment
- Fallout from the UK vote to leave the EU appears relatively mild to date, though sentiment indicators softened.
- High-frequency data for the traditional manufacturing sector suggest economic activity may have weakened.
- Bond yields and CDS spreads widened briefly after the vote but then returned to a downward trend; stock prices partially recovered while bank share prices remained depressed.
- Markets unsettled after the US Presidential election led to a temporary uptick in Irish bond spread.

### Labor market and inflation
- Unemployment rate fell to 7.2 percent in December 2016 from 8.9 percent at end-2015.
- Net migration turned positive for the first time since 2009; labor force participation edged up.
- Headline inflation hovered in negative territory during most of 2016; core inflation averaged about ½ percent, driven by services prices.

### Public finances
- In 2016H1, the headline general government deficit almost halved to 1 percent of GDP compared to the same period a year ago.
- Staff estimates the headline general government budget deficit at 0.9 percent of GDP in 2016.
- Gross general government debt is estimated to decline to 76.4 percent of GDP in 2016 from 78.7 percent of GDP in 2015.
- Revenue rose by 3.4 percent y/y in 2016H1, mainly due to higher-than-expected corporate income tax intake; within-year expenditure increases, mainly in the health sector, absorbed most of the tax over-performance.

### Credit, debt, and balance-sheet developments
- Banks’ credit to the non-financial private sector contracted by almost 6.5 percent y/y in November 2016.
- Household debt declined to about 161 percent of gross disposable income in Q2 2016 from an average of about 170 percent in 2015.
- New bank lending to SMEs increased from a very low base, but the overall stock of credit to non-financial corporates continued to decline.
- Corporate-sector debt registered an upward level shift in 2015 to about 267 percent of GDP from 219 percent of GDP in 2014, driven by corporate restructuring by large multinationals.

### Property markets and housing policy
- Housing completions have picked up only moderately and remain well short of the underlying requirement.
- The stock of properties listed for sale was at a nine-year low; house price increases accelerated to 7.1 percent y/y in October 2016.
- The value of mortgage approvals surged by 43 percent as of November compared to a year earlier.
- Residential rents rose sharply and have exceeded their pre-crisis peak.
- Government introduced rental growth caps of 4 percent in Rent Pressure Zones (RPZ) starting in 2017.
- Government introduced a multi-pronged Housing Action Plan in July to be implemented over 2017-21 (Annex II).

### External sector
- The large current account surplus increased in the first three quarters of 2016, mainly due to a narrower primary income deficit.
- Exports associated with contract manufacturing decelerated; underlying exports remained strong.
- Sustained domestic demand supported import growth, leading to a narrowing of the merchandise trade surplus.
- The services deficit declined mainly due to higher computer and business service exports.
- Gross external debt declined due to lower external liabilities of the general government and monetary financial institutions.

---

### THE OUTLOOK IS FAVORABLE

### Baseline forecast and composition
- Staff estimates real GDP growth at 4½ percent in 2016, 0.4 percentage point lower than expected at the time of the July Article IV.
- A growth slowdown to 3.2 percent continues to be forecast in 2017.
- Over the medium term, growth is projected to decelerate gradually to just below 3 percent.
- The modest positive output gap would close from above over the projection period.
- Employment is expected to grow broadly in line with core domestic activity, bringing down the unemployment rate to around 6½ percent by the end of the forecast period.
- Headline inflation is projected to edge up next year and gradually converge towards 2 percent over the medium-term.
- Trade and current account balances will remain in surplus, though narrowing.

### Risks and forecast uncertainty
- Quarterly data show some volatility; uncertainty surrounding the forecasts is particularly elevated following the 2015 national accounts revision.

---

### CAPACITY TO REPAY IS STRONG, DESPITE SUBSTANTIAL DOWNSIDE RISKS

### Financing position and liquidity
- In 2016, the National Treasury Management Agency (NTMA) raised €8.4 billion in long-term bonds, including the issuance of Ireland’s first 100-year note at a weighted average yield of 0.8 percent.
- As of end-2016, the Exchequer’s cash balance stood at €8.4 billion, which rises to €8.6 billion if other liquid financial assets are added.
- This liquidity buffer is equivalent to about two-times the outstanding obligations to the Fund, and covers about 6 months of average annual financing needs over 2017–22.
- ECB secondary market purchases in Irish paper are about €1 billion a month (broadly equivalent to staff estimates of average monthly gross financing needs in 2017).
- On January 4, 2017, the NTMA raised €4 billion through a new 20-year benchmark bond.

### Downside risk assessment
- A small, highly open economy with a highly concentrated industrial base is particularly vulnerable to shocks, amplified by legacy high public and private sector debt levels.
- Key risks highlighted include Brexit, a challenging political environment, and international taxation changes (Box 1).
- Brexit effects:
  - Introduces significant risk and uncertainty due to important trade and financial linkages with the UK.
  - Particularly relevant for agri-food, clothing and footwear, and tourism sectors.
  - Could create a significant drag on euro area growth with second-round effects on Ireland.
  - Possible relocation of EU-oriented firms from the UK to Ireland represents a potential upside, but output effects are likely relatively limited.
- Political context:
  - A challenging political environment and adjustment fatigue may complicate policymaking for the new minority government.
  - The border with Northern Ireland has returned as a central issue in the context of Brexit.
- Taxation issues:
  - The EC ruling that Ireland granted undue tax benefits to Apple Inc. highlighted complexities of multinational operations and contributed to tax-uncertainty concerns.
  - Implementation of the OECD’s BEPS initiative and the EC proposal to relaunch CCCTB are particularly relevant for Ireland.
  - Potential changes to the U.S. corporate income taxes could also have a bearing given the strong presence of US-based multinationals.

---

### Box 1 — International Taxation Issues (summary)
- EC State-Aid Ruling:
  - On August 30, the EC issued a ruling that Ireland granted up to €13 billion (equivalent to almost 5 percent of GDP) in illegal state aid to Apple Inc. in the form of unjustified tax benefits over 2003-14.
  - Under the decision, Ireland was required to recover this amount, plus interest, from Apple. The Irish government has appealed; money recovered to be kept in an escrow account pending legal proceedings.
  - The ultimate availability of this tax revenue is highly uncertain given the pending appeal and potential competing claims from other jurisdictions.
  - The government appointed an independent expert to review Ireland’s corporation tax code, expected by mid-2017.
- OECD BEPS:
  - Over 100 jurisdictions collaborate to reduce tax avoidance; agreement on key principles reached in 2015; implementation underway.
- CCCTB:
  - In October, the EC relaunched the proposal for a Common Consolidated Corporate Tax Base, proposing a two-stage process mandatory for multinational groups with global revenues exceeding €750 million a year.
  - First stage: establish a common base, incentives for R&D, and measures to neutralize debt bias.
  - Second stage: consolidate profits and losses for a group’s operations within the EU and establish an apportionment formula.
  - The proposal does not cover tax rates, which remain set at the national level.

*International Monetary Fund staff report excerpt (Ireland, 2016).*

### 11.      A number of factors mitigate the potential impact of these risks on Ireland’s capacity

### 11.      A number of factors mitigate the potential impact of these risks on Ireland’s capacity to repay the Fund

### Mitigating factors for repayment capacity
- Government commitment to a prudent budgetary strategy over the medium term; contingent fiscal risks from the financial sector have declined substantially.
- Staff projection: sound fiscal performance is projected to bring gross public debt close to 60 percent of GDP by 2022.
- Gross financing needs for the 2021–23 period—when the remaining liabilities to the IMF fall due—are described as relatively modest.
- Funding strategy has significantly smoothed medium-term gross financing requirements; projected hump in 2020 is likely to be dealt with well in advance through debt management operations.
- Ireland has regained strong market access, demonstrated by one of the longest average debt maturities among EU countries and a constantly high bid-to-cover ratio.
- Potential additional resources for debt reduction not incorporated into current projections: privatization proceeds and a settlement of the EC ruling on Apple Inc.

### Indicators of Fund credit (selected figures for 2017–23)
- Obligations to the Fund (in percent of quota): 3/1.4, 1.4, 1.4, 1.4, 69.3, 31.5, 10.2 (2017–2023 as presented).
- Obligations to the Fund (in percent of GDP): 0.0, 0.0, 0.0, 0.0, 0.9, 0.4, 0.1.
- Obligations to the Fund (in percent of exports of goods and services): 0.0, 0.0, 0.0, 0.0, 0.7, 0.3, 0.1.
- Obligations to the Fund (in percent of government revenue): 0.1, 0.1, 0.1, 0.1, 3.5, 1.5, 0.5.

*Source: IMF staff.*

### Authorities’ views and Brexit risks
- Authorities broadly concur with staff on outlook and direction of risks; project continued healthy growth supported by domestic demand and recovery in net exports despite modest slowdown.
- Agreed main risks: external factors (including Brexit-related uncertainty), sustained slow-growth in main trading partners, external political uncertainties.
- Noted risks: high concentration of value-added and fiscal revenues in a small number of companies (largely multinational corporates); uncertainty from international tax developments.
- Authorities agree capacity to repay the Fund remains strong.

Box 2 — Authorities’ estimates of Brexit impact:
- Initial “rule of thumb”: a 1 percent reduction in UK GDP would reduce Irish GDP level by about 0.2–0.3 percent, relative to baseline, over two years.
- Department of Finance/ESRI adverse scenario: if UK tariffs to the EU return to most-favored-nation status under WTO rules, level of Irish output could decline up to 3¾ percent in the long term (beyond the 0.5 percent of GDP reduction in 2017 incorporated into the Summer Economic Statement).
  - This estimate reflects a decline of about 30 percent in exports to the UK and 4 percent in total exports.
  - Under this scenario, the unemployment rate could increase by up to two percentage points overall in the long run.
- Studies point to important variations in exposure across sectors and regions, with traditional sectors most exposed.

### But continued fiscal prudence is crucial — 2017 budget and medium-term framework
- 2017 government target: headline deficit of 0.4 percent of GDP, an improvement of 0.5 percent of GDP versus the likely outturn for 2016.
- Given a positive output gap, authorities’ framework assumes a structural adjustment of about 0.8 percent of GDP in 2017.
- Staff projects smaller adjustments for 2017: overall adjustment 0.4 percent of GDP and structural adjustment 0.5 percent of GDP, reflecting uncertain yields from revenue-enhancing measures and more conservative growth projections.
- Government medium-term objective (MTO): structural deficit of 0.5 percent of GDP in 2018 and counter-cyclical stance thereafter; estimated positive overall structural balance of about 1 percent of GDP by 2021.
- Government intends to establish a contingency reserve (“rainy-day” fund) by allocating €1 billion of available space from 2019 onwards.
- Government announced aim to reduce debt-to-GDP ratio to 45 percent within a decade; staff projects these targets are achievable based on announced policies but notes staff baseline foresees slower deficit reduction in outer years.

### Fiscal projections (selected figures, 2016–21)
- Department of Finance projections:
  - Growth: 4.2, 3.5, 3.8, 3.6, 3.0, 2.8 (2016–2021).
  - Output gap: 1.8, 1.1, 0.5, 0.3, 0.2, 0.0.
  - Overall balance: -0.9, -0.4, -0.3, 0.2, 0.7, 1.1.
  - Structural balance: -1.9, -1.1, -0.5, 0.0, 0.6, 1.1.
  - Structural effort (pp): 0.3, 0.8, 0.6, 0.5, 0.6, 0.5.
  - Public debt 1/: 76.0, 74.3, 72.7, 70.2, 65.8, 63.0.
- Staff projections:
  - Growth: 4.6, 3.2, 3.2, 3.0, 2.9, 2.8 (2016–2021).
  - Output gap: 0.6, 0.5, 0.4, 0.3, 0.1, 0.1.
  - Overall balance: -0.9, -0.5, -0.3, 0.0, 0.4, 0.7.
  - Structural balance: -1.2, -0.7, -0.5, -0.1, 0.3, 0.6.
  - Structural effort (pp): -0.1, 0.5, 0.2, 0.4, 0.4, 0.3.
  - Public debt 1/: 76.4, 75.0, 73.6, 71.5, 67.2, 64.8.
- Note: 1/ Taking into account the accumulation of a Rainy Day Fund of €1 billion starting in 2019.

### Staff assessment of fiscal stance
- Views government overall fiscal targets as broadly appropriate given substantial risks.
  - While a more ambitious structural adjustment may have been feasible in 2017, the budget balances deficit reduction and modest “recovery dividend.”
  - Emphasizes need to maintain steady progress in restoring fiscal buffers; public debt and interest payments remain elevated, particularly when expressed in terms of general government revenue.
  - Highlights vulnerability to external shocks and revenue volatility due to multinational operations; CIT proceeds are highly concentrated, with ten mainly multinational companies accounting for about 40 percent of the tax intake.
  - Advises against using potentially temporary revenue gains to fund permanent expenditure increases or tax cuts; welcomes government ambition to reduce debt-to-GDP ratio within the coming decade.

### 2017 fiscal measures (distribution and totals)
- Overall estimated cost: about €1.3 billion (½ percent of GDP), distributed between spending increases and tax cuts on a 3 to 1 basis.
- Revenue-reducing measures include:
  - Reduction of the three lowest Universal Social Contribution (USC) rates by 0.5 percent (from 1 percent to 0.5 percent; from 3 percent to 2.5 percent; from 5.5 percent to 5 percent): -309 (€ millions) (-0.1 percent of GDP).
  - Help-to-Buy Scheme for first-time buyers (PAYE rebate up to 5 percent for new properties up to €400,000; relief up to €20,000 for new homes €400,000–€500,000; tax rebate to expire in 2019): -335 (€ millions) (-0.1 percent of GDP).
  - A €100 increase in the Home Carer Tax Credit (from €1,000 to €1,100): -500.0 (€ millions).
  - A €400 increase in the Earned Income Credit for self-employed (from €550 to €950): -70.0 (€ millions).
  - Increase by 50 cents per cigarette pack: -330.0 (€ millions) [note: presented with minus sign convention for deficit-increasing measures].
  - Increase in threshold for gifts and inheritance from €280,000 to €310,000: 650.0 (€ millions).
  - Tax compliance measures: -220.0 (€ millions).
  - Other revenue measures: 1300.0 (€ millions).
  - Total revenue measures listed: -570.0 (€ millions) in the table context; overall total measures: -1,340 (€ millions) (-0.5 percent of GDP).
- Expenditure side: about 80 percent of the €1 billion increase falls on current spending:
  - Health: -266 (€ millions) (-0.1 percent of GDP).
  - Housing: -257 (€ millions) (-0.1 percent of GDP).
  - Education: -170 (€ millions) (-0.1 percent of GDP).
  - Social protection: -178 (€ millions) (-0.1 percent of GDP).
  - Childcare: -850.0 (€ millions).
  - Other expenditure measures: -750.0 (€ millions).
- Table note: 1/ Reduction in tax/increase in cost is denoted with a minus as they are deficit-increasing measures.

### Policy priorities and recommendations
- Strengthening investment spending:
  - Public spending on investment is increasing but projected to lag the EU average; increasing well-targeted capital expenditure would bolster competitiveness and well-being.
  - Consider redirecting savings from improved current spending efficiency to capital investment within the tight expenditure envelope.
- Mitigating housing market imbalances:
  - Support for expanding and expediting housing and rental delivery under the Housing Action Plan; supply-side measures welcomed.
  - Concerns about Help-to-Buy (HTB) scheme: temporary and relatively limited, provides only indirect support for supply, has a relatively high threshold for mortgage value, risks exacerbating demand and pricing pressures; an early review to improve targeting is warranted.
  - Plans to phase increase interest relief for buy-to-let landlords from 75 percent to 100 percent by 2021 raise similar concerns.
  - Consider fast-tracking locally levied vacant lot tax (expected in 2018) to incentivize land utilization.
  - Administrative measures on rents could dissuade construction and may be ineffective if landlords pass on costs to tenants.
- Reforming personal income taxation:
  - Government intends to phase out the USC over five years; staff warns this should not reduce breadth and stability of the tax base.
  - Suggest merging USC into a broader income tax with lower rates for below-median wage earners to reduce middle-income tax burden; offset costs by reducing number of reduced/zero VAT products and scaling up property tax.
- Addressing expenditure pressures:
  - Any expenditure increases beyond programmed plans would need offsetting tax increases or spending cuts to meet deficit targets.

### Authorities’ reiteration
- Authorities reiterated commitment to a prudent fiscal stance: revenue projected to increase broadly in line with nominal GDP; expenditure to expand at a more moderate pace, consistent with the EU fiscal framework expenditure benchmark.
- Highlighted plan to reduce debt-to-GDP ratio to 45 percent within a decade and establishment of a rainy day fund as key supportive measures.
- Noted significant positive social impact of 2017 budget: largest gains for bottom quintile; population at-risk-of-poverty would fall by almost one percentage point.
- Regarding housing fiscal incentives, authorities emphasized limited scope and support for supply-side measures in Housing Action Plan.
- Intention to continue to phase out USC over time, conditional on available resources to meet deficit targets (e.g., elimination of tax credits for higher income earners and non-indexation of tax brackets).

### As is sustained balance sheet repair — banks and remaining risks
- Balance sheet repair of domestic banks continues; risks remain and operating environment is difficult.
- Europe-wide and FSAP stress tests indicate domestic banks remain vulnerable to adverse macroeconomic shocks.
- Risks to Ireland’s budget and capacity to repay have declined substantially.
- Bank profitability has recovered somewhat due to higher net interest margins and improved asset quality, but remains relatively low, particularly when provision write-backs are excluded.
- Recent unfavorable developments weaken prospects for material improvement:
  - UK’s decision to leave the EU likely to affect domestic banks’ capacity to generate capital organically due to direct and indirect UK exposures; UK accounts for about 20 percent of domestic banks’ aggregate revenues.
  - Permanent TSB sold its UK mortgage portfolio in October, completing its €8.4 billion deleveraging plan; reported to involve a 15 percent haircut on the £2.29 billion face value of the Capital Home Loans portfolio.
  - Negative market sentiment has delayed government plans to further dispose of stakes in the banking sector; divestment should continue when market conditions support it to reduce public debt and contingent liabilities.
  - Legislative proposal on variable rate mortgages (empowering central bank to cap rates if a “market failure” is identified) reportedly heightened investor uncertainty; staff warns undue interference in banks’ price setting could undermine competition and prospects to narrow the mortgage rate spread.

### Irish banks — key financial indicators (selected, percent or point values as presented)
- Credit growth (2012–2016Q3): -10.2, -10.8, -4.3, -8.6, -5.3.
- Return on assets: -2.0, -0.8, 0.6, 0.7, 1.0.
- Pre-provision profits 2/: -0.2, 0.4, 0.5, 0.7, 0.6.
- Net interest margin: 0.8, 1.2, 1.6, 1.8, 1.9.
- Cost-to-income ratio: 166.0, 72.7, 64.1, 62.5, 58.2.
- NPL ratio: 24.8, 27.1, 23.2, 16.1, 14.2.
- Coverage ratio: 48.5, 51.4, 51.7, 51.8, 52.0.
- Texas ratio 3/: 115.0, 120.0, 106.0, 93.4, 79.7.
- CT1 ratio: 14.7, 13.3, 15.5, 14.9, 15.0.
- Net loan to deposit: 124.0, 111.0, 108.0, 106.0, 105.4.
- Net stable funding ratio: 82.3, 96.1, 110.5, 112.9, 116.0.
- Liquidity coverage ratio: 92.3, 107.7, 109.9, 107.8, 118.7.

1/ Indicators cover the three main domestic banks: Allied Irish Banks, Bank of Ireland, and Permanent TSB. Figures are based on Q4 data.
2/ Based on quarterly data and excluding nonrecurrent items, as a share of average total assets.
3/ NPLs to sum of provision stock and CT1 capital.

*Source: IMF staff; Central Bank of Ireland.*

### 19.      Distressed loan resolution continues, but progress across loan categories is uneven.

### 19.      Distressed loan resolution continues, but progress across loan categories is uneven.

### NPL trends and composition
- Nonperforming loans (NPLs) of domestic banks declined to 14.2 percent in 2016Q3 from 16.1 percent in 2015Q4.
- Distressed mortgages account for around 50 percent of banks’ nonperforming book.
- Deep arrears segment defined as 720 days and above; resolution in this segment remains slow owing to lengthy legal proceedings and weak creditor-borrower engagement.

### Progress across loan categories and resolution channels
- Significant headway has been made in resolving distressed SMEs and CRE loans, particularly through restructuring and loan disposals.
- Resolution of distressed mortgages has been comparatively slow, especially in the deep arrears segment (720 days and above).
- The recently introduced state-funded “Advice-and-Arrears” scheme allows distressed mortgage borrowers access to free legal and financial advice for owner-occupied properties and has already showed promise in improving borrower-creditor engagement.
- Further reduction in NPLs would free up banks’ capital and help restore the credit channel; sustained efforts are needed to advance the cleanup of banks’ balance sheets through loan restructuring where feasible and measures to ensure more efficient legal proceedings.
- Government plans include establishing a special court to handle mortgage arrears and other personal insolvency matters to make legal proceedings more efficient.

### Macroprudential framework and credit registry
- The macroprudential measures introduced in 2015 play an important role in strengthening banks and household resilience.
- The Central Bank completed its first comprehensive review of the measures in November and modified several parameters under the framework to simplify and improve effectiveness; changes include extension of the valuation period to four months from two months and exclusion of commercial landlords and developers from the scope of regulations, coming into force from January 1, 2017.
- The Central Credit Register (CCR), which includes the collection of information on individual borrowers, is expected to become operational in early 2018.
- Steadfast headway toward full implementation of the CCR, including the second phase that covers businesses, remains key; the second phase of the CCR implementation is expected to become operational in late-2018, though lenders’ capacity to deliver adequate data within the timelines is an important dependency for implementation.
- Full CCR implementation will support conversion of the current Loan-to-Income (LTI) limit into a Debt-to-Income (DTI) limit.

### Central Bank’s mortgage-market calibration (Box 3)
- Loan-to-Value (LTV) limits for primary dwelling homes:
  - Until January 1, 2017: 90 percent on the first 222,000 of the value of residential property and 80 percent limit thereafter. 15 percent of all new lending allowed above limits (First time buyers).
  - Until January 1, 2017: 80 percent limit. 15 percent of all new lending allowed above limits (Second and subsequent buyers).
  - From January 1, 2017: 90 percent limit. 5 percent of all new lending allowed above limits (First time buyers).
  - From January 1, 2017: 80 percent limit. 20 percent of all new lending allowed above limits (Second and subsequent buyers).
- Buy-to-let: Current (not revised): 70 percent limit; 10 percent of all new lending allowed above limits.
- Loan-to-Income (LTI) limit for primary dwelling homes: Current (not revised): 3.5 times; 20 percent of all new lending allowed above limits.

### Authorities’ views and near-term actions
- Authorities broadly agreed with staff on challenges to the banking system, noting banks’ profitability has not reached sustainable levels and near-term prospects for further improvement are limited without rising interest rates or loan growth.
- The proposed bill on variable rate mortgages is subject to “pre-legislative consideration” by the Irish legislature (Oireachtas) and will need careful evaluation to minimize unintended consequences.
- Preparations for an initial public offering of 25 percent of the government’s AIB stakes continue, with timing as soon as this year if conditions allow.
- Authorities noted that main data protection issues for the CCR have been addressed and work is underway to ensure the first phase will commence on time.

### Staff appraisal and policy implications
- Intensified supervisory oversight of banks’ internal management of NPL resolution should continue to ensure prolonged mortgage arrears are tackled through loan restructuring where feasible.
- The Advice-and-Arrears scheme shows promise in improving borrower-creditor engagement, but making legal proceedings more efficient is critical to accelerate the resolution process.
- Continued implementation of the CCR and recalibration of macroprudential measures support prudent lending and better assessment of borrowers’ repayment capacity through conversion from LTI to DTI once CCR is fully operational.

*Source: Central Bank of Ireland; IMF staff.*

### 28.      Continued vigilance is needed to safeguard macro-financial stability, especially

### 28.      Continued vigilance is needed to safeguard macro-financial stability, especially 

### Policy assessment and recommendations
- The macroprudential measures introduced in 2015 serve an important role in strengthening the resilience of banks and household to adverse shocks.
- The recalibration of the macroprudential framework is reasonable given early experience with the framework and current dynamics in the housing market.
- Steadfast progress toward full implementation of the CCR and replacing the LTI limit with a DTI limit, which better captures the borrowers’ repayment capacity, remain key to ensure prudent lending.

### Major macroeconomic projections and dynamics (selected)
- Real GDP (annual percentage change): 8.4, 2.6, 3.4, 4.6, 3.2, 3.2, 3.0, 2.9, 2.8 (2014–2022)
- Domestic demand (annual percentage change): 7.7, 9.9, 6.8, 3.4, 3.4, 3.2, 3.0, 2.9, 2.9 (2014–2022)
- Inflation (HICP, annual percentage change): 0.3, 0.0, -0.2, 0.8, 1.4, 1.6, 1.7, 1.9, 1.9 (2014–2022)
- Inflation (HICP, end of period): -0.3, 0.2, -0.4, 1.3, 1.5, 1.7, 1.8, 1.9, 1.9 (2014–2022)
- Unemployment rate (percent): 11.3, 9.5, 7.9, 7.1, 6.9, 6.6, 6.6, 6.6, 6.5 (2014–2022)
- Overall balance (percent of GDP): -3.7, -1.9, -0.9, -0.5, -0.3, 0.0, 0.4, 0.7, 1.0 (2014–2022)
- Primary balance (percent of GDP): 0.1, 0.7, 1.4, 1.8, 1.7, 1.9, 2.1, 2.3, 2.6 (2014–2022)
- General government gross debt (percent of GDP): 105.4, 78.7, 76.4, 75.0, 73.6, 71.5, 67.2, 64.8, 60.9 (2014–2022)
- General government net debt (percent of GDP): 96.1, 71.8, 70.0, 68.2, 66.2, 63.8, 61.3, 58.7, 55.2 (2014–2022)
- Current account balance (percent of GDP, Table 3): 3.2, 26.2, 20.8, 16.6, 16.3, 15.6, 14.9, 14.7, 15.0 (2014–2022)
- Trade balance (billions of euros, Table 3): 40.7, 110.6, 110.3, 116.2, 121.3, 125.9, 130.1, 134.2, 138.6 (2014–2022)
- Exports of goods (billions of euros): 114.5, 195.6, 193.9, 204.4, 214.5, 224.0, 233.2, 242.4, 252.2 (2014–2022)
- Imports of goods (billions of euros): -73.7, -85.0, -83.5, -88.2, -93.2, -98.1, -103.1, -108.2, -113.6 (2014–2022)

### Financial sector and vulnerability indicators (selected)
- Annual credit growth rates (to Irish resident private sector, in percent): -4.0, -4.9, -4.5, -4.6, -3.2 (2012–2016)
- Loans for house purchase (percent of total personal lending): 28.1, 29.9, 34.5, 38.5, 38.2 (2012–2016)
- Non-performing loans (in percent of total loans): 25.0, 25.7, 0.2, 0.1, 0.2 (2012–2016)
- Total provisions for loan losses (in percent of total loans): 9.8, 10.4, 8.0, 4.8, 5.3 (2012–2016)
- Regulatory Tier 1 capital to risk-weighted assets of domestic banks (in percent): 16.7, 17.3, 0.2, 0.2, 0.2 (2012–2016)
- Bank return on assets (percent): -0.8, -0.4, 0.4, 1.0, 1.2 (2012–2016)
- Bank return on equity (percent): -7.8, -6.8, 5.3, 5.7, 9.5 (2012–2016)

### Fiscal stance and composition (selected)
- Revenue (percent of GDP): 34.1, 27.6, 27.2, 27.4, 26.9, 26.8, 26.5, 26.3, 26.2 (2014–2022)
- Expenditure (percent of GDP): 37.8, 29.5, 28.2, 27.9, 27.2, 26.7, 26.1, 25.7, 25.2 (2014–2022)
- Social benefits (percent of GDP): 14.6, 11.0, 10.6, 10.4, 10.2, 9.9, 9.7, 9.5, 9.3 (2014–2022)
- Interest (percent of GDP): 3.9, 2.6, 2.4, 2.3, 2.0, 1.8, 1.7, 1.6, 1.6 (2014–2022)
- Net lending(+)/borrowing(-) (overall balance, in billions of euros, Table 2A): -7.2, -4.8, -2.5, -1.4, -0.9, 0.1, 1.2, 2.2, 3.4 (2014–2022)

### Balance sheet and banking system snapshots (selected)
- Aggregate balance sheet of domestic market credit institutions, total assets (billions of euros): 555.1, 476.6, 423.4, 377.6, 359.5 (2012–2016)
- Claims on Irish resident non MFIs (billions of euros): 326.0, 280.5, 236.5, 205.8, 194.1 (2012–2016)
- Deposits of Irish resident non MFIs (billions of euros): 153.8, 175.3, 163.1, 166.6, 168.1 (2012–2016)
- Irish Resident Broad money (M3, billions of euros): 180.4, 200.8, 174.9, 189.5, 198.7 (2012–2016)
- Main domestic banks (Bank of Ireland, Allied Irish Banks, Permanent tsb) - selected balance sheet items (2015Q3, 2016Q3):
  - Total assets: 249.6, 230.2 (€ bn)
  - Net loans: 170.7, 160.8 (€ bn)
  - Deposits: 158.9, 152.5 (€ bn)
  - Gross NPLs: 35.9, 24.7 (€ bn)
  - Net income: 1.8, 0.7 (€ bn)
  - Core tier 1 capital (CT1) and CT1 to RWA (%): 20.5, 16.6 (CT1); 18.1, 15.0 (CT1 to RWA)
  - CT1 to total assets = leverage ratio (%): 8.2, 7.9

*Source: IMF staff and tables in the supplied content.*

### Annex I. National Accounts Revision

### Annex I. National Accounts Revision

### Summary of the revision and main drivers
- In July 2016, Ireland’s Central Statistics Office (CSO) revised substantially the national accounts for 2015, mainly due to corporate restructuring operations of a small number of multinational companies, including the relocation to Ireland of companies’ entire balance sheets and the shift of assets to Irish subsidiaries.
- As a result, the GDP growth rate was upgraded from 7.8 percent to 26.3 percent.
- On the supply side, the revision was due to a level shift in the stock of capital assets (mainly intellectual property) in Ireland.
- The mirror image was a substantial negative revision of Ireland’s NIIP due to higher liabilities to nonresidents.
- On the demand side, Ireland’s net exports were substantially revised upward, reflecting an increase in “contract manufacturing” and lower payment of royalties due to the on-shoring of intellectual property.
- The CSO estimates that in 2015:
  - the output of foreign-owned multinational enterprises (MNE) grew by 101 percent, and
  - the non-MNE dominated sectors of the Irish economy increased by 4.4 percent over the same period.

### Scale and concentration of multinational activity
- In 2015, foreign-owned multinational enterprises accounted for almost 40 percent of Ireland’s gross value added at constant 2014 basic prices.
- The substantial share of foreign-owned MNE activity recorded in Ireland means a very significant amount of activity carried out in other countries is now recorded in Ireland’s national accounts.

### Statistical and policy implications
- Headline GDP and GNP figures no longer provide an effective measure of economic activity that physically takes place in the national territory, complicating the measurement of the domestic economy.
- Consequences highlighted:
  - It becomes more difficult to gauge the cyclical position of the economy and hence the appropriate setting of economic policies.
  - Headline GDP may become more volatile, together with the tax base, as investment in intellectual property may easily move across jurisdictions.
  - Productivity as well as potential output and the output gap are more difficult to estimate.
  - Traditional fiscal metrics, usually expressed in percent of nominal GDP, need to be assessed carefully (for example, although the debt-to-GDP ratio fell 15 percentage points based on the change of methodology, the economy’s capacity to sustain its debt has not changed).

### Measurement responses and institutional arrangements
- The CSO has convened a high-level cross-sector consultative group (the Economic Statistics Review Group) to provide guidance on developing a broader or more detailed suite of indicators that give greater insight into economic activity in Ireland.
- The Group is chaired by the Governor of the Central Bank of Ireland and comprises Eurostat and the IMF as international observers.
- The Group’s findings are expected to be communicated in early 2017.

### Definition note
- “Contract manufacturing” refers to a special form of outsourcing, where an Irish company engages a company abroad to manufacture products on its behalf but retains the economic ownership of the inputs used in this production process. This process includes the import of intermediate inputs and manufacturing services by the Irish company. Subsequently, when the product is sold to a customer abroad, a change in economic ownership takes place and the export of this good is then recorded in the Irish national accounts and balance of payments, even though it was never physically present in Ireland.

*Source: Central Statistics Office; and IMF staff.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1734.pdf_