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### EXECUTIVE SUMMARY — Retaining Credibility
- Authorities’ measures to stabilize the economy and gain policy credibility:
  - Implementation of the National Asset Management Agency (NAMA) to transfer distressed property development and commercial real estate assets from banks.
  - Initiation of banks’ capital enhancement.
  - Ambitious fiscal consolidation proceeding as planned.
- Effect on markets:
  - Policy credibility has partially insulated Ireland from market pressures; sovereign spreads have risen significantly on days of intense adverse international sentiment but otherwise allowed policy trajectory to proceed.
- Key risks and constraints:
  - Recovery prospects weighed down by correction of pre-crisis imbalances (rapid credit growth, inflated property prices, high wage and price levels).
  - Exports likely to lead the recovery but with limited domestic spillovers because of low domestic value-added, high capital intensity, and repatriation of profits by multinationals.
  - Decline in domestic price levels needed to restore competitiveness creates deflationary demand risks in the interim.
  - Deleveraging and banks’ risk aversion will constrain lending, at least in 2010–11.
  - Unforeseen fiscal needs and episodes of heavily bunched banks’ funding needs could generate unwelcome pressures.
- Policy implications for preserving credibility:
  - Orderly disposal of NAMA’s assets to help restore the commercial property market.
  - Attention to distress among economically-vulnerable homeowners.
  - Reshaping the banking sector to a new strategic vision and business model.
  - Ambitious redesign of regulatory and supervisory system requires a special bank resolution framework.
  - Efforts to facilitate gradual exit from the government’s guarantee of bank liabilities.
  - Planned fiscal consolidation requires sustained implementation and, if insufficient, should be supplemented by additional measures.
  - A stronger fiscal framework would guide consolidation as crisis urgency abates.
- Staff visit: Team visited Dublin during May 20–31, 2010.

*Source: IMF staff report EXECUTIVE SUMMARY*

### NEAR-TERM GROWTH AND EMPLOYMENT OUTLOOK — Output and External Linkages
- 2009 performance and recent developments:
  - Irish GDP fell by 7.1 percent in 2009.
  - GNP fell by 11.3 percent in 2009.
  - Economy stabilized in 2009:Q3; q-o-q contraction of 2.3 percent in 2009:Q4.
  - Domestic consumption and investment (particularly construction) declined; net exports contributed positively as imports contracted more than exports.
- Drivers of the downturn:
  - Pre-crisis concentration in construction and financial intermediation (share of GDP to more than 15 percent) reversed during contraction.
  - Overvalued properties and an unsustainable private credit-to-GDP ratio unwound, amplifying employment and confidence losses.
- 2010 staff projection and uncertainty:
  - Staff projects GDP for 2010 to be ½ percent lower than in 2009, with a q4-on-q4 increase of about 2 percent.
  - Short-term indicators mixed: industrial production pulled back after a sharp January rise; goods exports recovering from weak H2 2009; sentiment measures improved but did not reflect recent financial tensions; recent unemployment data disappointing.
  - Authorities see scope for a larger cyclical rebound in 2010–11.
- External linkages:
  - Ireland’s openness exposes it to international shocks and contagion; policy credibility has helped limit spillovers.
  - Irish-based banks’ exposure to Greece was $8.5 billion (3½ percent of GDP) at end-2009; exposure of Irish banks covered by the government’s guarantee is of the order of €40 million.

### NEAR-TERM GROWTH AND EMPLOYMENT OUTLOOK — Employment
- Unemployment trends and outlook:
  - Headline unemployment increased from 4½ percent in 2007 to 13 percent in 2010:Q1.
  - Broader measures including marginally-attached workers put unemployment closer to 17 percent.
  - Headline unemployment likely to peak this year at 13¾ percent before declining to 9½ percent by 2015.
- Nature and risks:
  - Sharpest employment decreases in construction and manufacturing; some lost jobs may not return.
  - Long-duration unemployment has more than doubled since 2007 and risks human capital depreciation.
- Emigration and participation:
  - Emigration eased labor market pressures; staff estimates unemployment could have been as much as 2 percentage points higher without emigration (based on 2010:Q1 Labor Force Survey).
  - Labor force participation fell mainly among the young; participation also fell among older males.

### STRENGTH AND SHAPE OF THE RECOVERY
- Growth and potential:
  - Staff projects GDP growth to gradually recover to 3½ percent by 2015.
  - Potential growth expected to rise from the current 1 percent to about 2½ percent by 2015 as internal imbalances are corrected.
  - Loss in potential output expected to be permanent relative to pre-crisis trend; output was above potential by 5–7 percent in 2007 and output gap in 2009 ranges from -3½ to -7 percent.
- Structural implications:
  - Pre-crisis house price and construction booms led to larger negative output gaps and greater deflation risk during adjustment.
  - Correction of imbalances will produce a weaker and more protracted recovery relative to peers.
  - Restoring competitiveness requires price declines but risks deflationary demand effects needing management.
  - Financial-sector repair and improved access to lending are critical to transmit recovery to domestic demand.

### EXPORT-LED RECOVERY — Performance, Composition, and Constraints
- Export performance:
  - Irish export volumes contracted by 2¼ percent in 2009, compared with a 14¼ percent fall in German export volumes in 2009.
  - About two-thirds of Irish exports are destined for Europe.
  - By staff projections, annual export growth will rise only gradually to 4–5 percent in 2013–15.
- Structure and inward investment:
  - Large chemicals export base (notably pharmaceuticals) supported exports even as office machinery exports fell sharply.
  - Multinationals, particularly from the United States, substantially raised presence in the late 1990s, linking Ireland to global supply networks.
  - Ireland’s export-to-GDP ratio rose alongside an increase in the import-to-GDP ratio, reflecting heavy import content of exports.
  - Departure of Dell to Poland in early 2009 exemplified loss of edge in low-end manufacturing.
  - Export growth sustained more by repositioning as a service exporter and “knowledge hub”.
- Competitiveness and internal devaluation:
  - Recent declines in unit labor costs reduced the gap with euro area countries, driven mainly by productivity improvements reflecting compositional shifts.
  - CGER estimates suggest the real effective exchange rate is broadly in line with medium-term fundamentals.
  - High Irish price and wage levels will require a period of “internal devaluation” over the next few years.
- Deflationary dynamics:
  - Prices fell at an annual pace of 2½ percent in April, moderating to 1.9 percent in May.
  - Fraction of price-index components falling peaked at 80 percent in April and remained at 67 percent in May.
  - Staff projects a 1.8 percent decline in prices this year and a further fall of 0.5 percent in 2011.
  - An index capturing deflationary pressure ranks Ireland as the most vulnerable country to deflationary pressures (Deflation vulnerability indicator, 2009 Q4).
  - Real interest rates have risen sharply following the crisis after being especially low during the boom.

### DEBT OVERHANG, CREDIT CONDITIONS, AND MACRO-FINANCIAL LINKAGES
- Leverage implications:
  - Household and corporate leverage rose substantially during the boom; deflation will slow recovery as debtors repay unchanged nominal debts in an environment of falling prices and higher real interest rates.
- Banking sector stress and funding:
  - Bank NPLs increased from ¾ percent at end-2007 to 9 percent at end-2009 and can be expected to increase further.
  - Ability to provision for NPLs has declined sharply; bank provisions to NPLs have been falling.
  - Capital ratios for large Irish banks declined while eurozone bank capital ratios rose since the crisis.
  - Banks’ reliance on wholesale funding and high loan-to-deposit ratios remain.
  - Authorities estimate over €70 billion (44 percent of GDP) of banks’ obligations will mature by September this year.
  - The Eligible Liabilities Guarantee scheme will cover new issuance of up to five years’ maturity, subject to European Commission review; extension may be needed depending on market conditions.
  - Irish banks have been heavy users of ECB liquidity facilities; ECB provision of liquidity peaked in the first half of 2009 and has since come down but remains high.
  - Retail bank deposits have been either flat or declining.
- Credit tightening effects (Box 3 statistical findings):
  - A fall of 0.5 in the ratio of bank stock prices relative to the overall stock market estimated to cause a gradual tightening of consumer and corporate lending standards by about 1/3 and 1, respectively (scale one to five).
  - Average quarterly tightening of lending standards during the latest cycle approximately 0.1, estimated to cause credit contraction of 0.15 percent of GDP for consumer loans and 0.5 percent of GDP for mortgage and corporate loans.
  - Relative to gross new lending in the last quarter of 2009, this corresponds to about 5 percent of consumer loans, 3 percent of mortgage loans and 1 percent of corporate loans.
  - Credit availability effects:
    - An increase in consumer credit of one euro associated with increased consumption of 80 cents with a one-quarter lag and a further 80 cents after one year.
    - A corporate loan of one euro associated with increased investment of 30 cents contemporaneously and an additional 40 cents after three quarters.
    - Mortgage credit has a significant contemporaneous effect on house prices, indirectly affecting residential investment.

### FINANCIAL SECTOR: RESTRUCTURING, NAMA, AND STABILITY FRAMEWORK
- Restructuring agenda:
  - Two-part agenda: (A) restructuring to address continued fallout from the crisis; (B) strengthen financial stability framework to limit future instability.
  - Objective: help phase out government guarantees of bank liabilities.
- NAMA operational facts (Box 4):
  - NAMA established in late 2009 to take over distressed property-development and commercial real estate assets from five of the banks covered by the government’s guarantee.
  - Under the completed first tranche, NAMA acquired loans with a book value of €15.3 billion for about €7.7 billion, representing an average discount of 50 percent.
  - In total, about €81 billion worth of loans are to be acquired at a deep discount by the end of this year.
  - Assuming an average discount of 50 percent, NAMA would ultimately issue about €41 billion of securities in total, up to 5 percent of which would not have to be honored if proceeds fall short.
  - Purchase and management delegated to a Special Purpose Vehicle with 51 percent private ownership but under NAMA’s control; NAMA-issued securities to be treated as off-balance sheet in the Irish budget.
  - A contingent liability—of 25 percent of GDP—will be extinguished if NAMA recovers its outlays.
  - Effects for banks: loan sales reduce balance-sheet uncertainty, increase liquidity reserves, reduce risk-weighted assets, and improve capital adequacy.
  - Capital shortfalls due to NAMA discounts are being met by a combination of private and public capital injections.
- Bank restructuring and governance:
  - Bank-by-bank restructuring of supported banks; disposal of noncore assets central; in one case a “good bank/bad bank” split is contemplated.
  - Strategic unit within the National Treasury Management Agency to foster market-oriented approach to a viable, competitive banking system.
- Homeowner support and personal insolvency:
  - Regulator required banks to wait 12 months from arrears before initiating repossession on primary residence if borrower engaged in restructuring.
  - Government programs assist with interest payments for recent mortgages and interest supplements to the neediest.
  - Staff proposal: narrowly-targeted additional support for vulnerable homeowners; banks recapitalized by the state could absorb initial costs; welfare system could identify eligible beneficiaries.
  - Personal insolvency regime: move to optional out-of-court resolution mechanism under discussion; staff recommends repayment period of three to five years and removal of overly punitive elements such as imprisonment for nonpayment of civil debts.
- Financial stability and supervisory reforms:
  - Progress: higher and better quality capital targets; focus on improved liquidity management.
  - Measures: strengthen bank board governance; raise fitness and probity requirements; safeguards against related-party lending.
  - Institutional change: de facto consolidation of the Central Bank and the Financial Regulator; bill to formalize arrangement; new risk-based supervisory approach and plans to upgrade onsite supervision.
  - Key challenge: ensure timely implementation with adequate resources and enhanced enforcement powers.
- Bank resolution and crisis preparedness:
  - Need for a special bank resolution framework with broader tools (establish bridge banks, assume liabilities, purchase assets).
  - Staff recommendation: early action to introduce a special bank resolution mechanism.
- Financial stability charge and taxation options:
  - Proposal elements: a risk-adjusted levy tied to a credible resolution mechanism to build a resolution fund; a financial activities tax on profits and remuneration to contribute to revenues and reduce sector size/systemic risk.
  - Authorities note controversy and will be guided by international practice.

### FINANCIAL SECTOR CAPITAL TARGETS AND RISKS
- Authorities set a target ratio of 8 percent for core-Tier 1 capital (of which 7 percent is to be equity capital), taking into account losses from loans transferred to NAMA and expected future losses on non-NAMA assets until 2012.
- Required capital injections will ensure banks’ core-Tier 1 capital would remain above 4 percent in a stress scenario.
- Recent rights issue by one major bank indicates some private capital is returning; authorities committed to fill remaining gaps so bank capital will not be a constraint on lending.
- Deleveraging to reduce loan-to-deposit ratio and banks’ risk aversion likely to constrain lending and recovery pace in 2010–11.
- Downside risks: higher than expected losses; uncertainties in global regulatory trends; renewed financial market tensions restricting funding access.
- Targets for SME lending imposed on two major banks in 2010–11 could adversely affect credit quality and require strong prudential safeguards.

### FISCAL OUTLOOK AND CONSOLIDATION AGENDA — Overview and Projections
- Consolidation actions and 2009–10 adjustment:
  - Authorities acted to raise fiscal consolidation ambition in response to a large structural deficit.
  - Strong upfront measures expected to yield a net adjustment of 5½ percent of GDP over 2009–10.
  - 2010 budget focused on expenditure measures: reductions in the wage bill, social welfare benefits, and public services spending (particularly health care and education).
  - Public service pensions scope reduced for new entrants, starting in 2010.
  - Revenue measures included a carbon tax.
- Staff and authorities projections and differences:
  - Authorities project the 2010 deficit to be 11½ percent of GDP.
  - Staff projects a deficit of 11.9 percent of GDP in 2010 due to lower nominal 2009 GDP and weaker growth projection.
  - Accounting treatment of government equity injections could raise the 2010 headline deficit substantially (example: 2½ percent of GDP reclassified raised 2009 deficit to 14¼ percent of GDP).
  - In the first half of 2010, government issued promissory notes worth 8½ percent of GDP to increase capital in one bank and two building societies; if considered capital transfers, the 2010 deficit would increase by this amount.
  - A further possible capital injection of 5 percent of GDP would add correspondingly to the 2010 deficit.
- Financing and cash management:
  - Remaining sovereign financing need in 2010 limited: average maturity of Irish treasury bonds is 7½ years; for 2010 about three quarters of planned government bond issuance (€20 billion) had been obtained as of June.
  - Annual financing needs in 2011–12 projected at about the 2010 level.
  - Authorities maintain sizeable cash balances, financed by short-term debt, as a buffer.
- Staff assessment of required adjustment:
  - Staff supports consolidation through 2014 but cautions required adjustment may be larger than authorities project.
  - Authorities’ plan: reduce deficit to below 3 percent of GDP by 2014; plan envisages fiscal adjustment of 4½ percent of GDP over 2011–14, of which about 1 percent of GDP represents reductions in capital expenditures.
  - Staff estimates adjustment need over 2011–14 would be 6½ percent of GDP, 2 percentage points of GDP higher than authorities’ estimate.
  - Staff and authorities concur on importance of meeting targets within agreed timeframe.

### SELECTED FISCAL PROJECTION HIGHLIGHTS (Percent of GDP, as in source)
- Revenue: 2009 = 33.6; 2010 = 34.5; 2011 = 34.9; 2012 = 36.4; 2013 = 36.8; 2014 = 36.9
- Tax revenue (incl. capital tax): 2009 = 21.8; 2010 = 21.1; 2011 = 22.0; 2012 = 23.5; 2013 = 23.9; 2014 = 24.1
- Expenditure: 2009 = 47.9; 2010 = 46.4; 2011 = 46.0; 2012 = 45.0; 2013 = 44.0; 2014 = 42.8
- Interest payments: 2009 = 2.1; 2010 = 2.8; 2011 = 3.3; 2012 = 3.8; 2013 = 4.1; 2014 = 4.4
- Capital expenditure: 2009 = 7.7; 2010 = 5.1; 2011 = 4.8; 2012 = 4.8; 2013 = 4.8; 2014 = 4.8
- Overall balance: 2009 = -14.3; 2010 = -11.9; 2011 = -11.1; 2012 = -8.6; 2013 = -7.3; 2014 = -5.9
- Structural balance (in percent of potential GDP): 2009 = -9.8; 2010 = -8.2; 2011 = -6.8; 2012 = -5.9; 2013 = -5.6; 2014 = -5.2
- General government debt: 2009 = 64.0; 2010 = 86.2; 2011 = 94.7; 2012 = 96.9; 2013 = 97.5; 2014 = 97.7

### DEBT TRAJECTORY, CONTINGENT LIABILITIES, AND SUSTAINABILITY
- Debt trajectory:
  - Staff projects government debt to increase steadily until 2014, but to stabilize below 100 percent.
  - Eurostat preliminary advice: debt issued by NAMA’s privately-owned Special Purpose Vehicle does not affect general government debt, although it would represent a contingent liability of more than 25 percent of GDP in 2010.
- Fiscal sustainability key numbers (Table A1 / Appendix I):
  - General government debt: 2009 = 64.0; 2010 = 86.2; 2011 = 94.7; 2012 = 96.9; 2013 = 97.5; 2014 = 97.7; 2015 = 97.5
  - Primary deficit (percent of GDP): 2009 = 12.2; 2010 = 9.1; 2011 = 7.8; 2012 = 4.8; 2013 = 3.2; 2014 = 1.5; 2015 = 0.2
  - Gross financing need (percent of GDP): 2009 = 14.3; 2010 = 22.0; 2011 = 20.8; 2012 = 17.9; 2013 = 13.9; 2014 = 10.1; 2015 = 7.8
- Sensitivity and stress tests (Figure A1 illustrative outcomes):
  - Baseline average projection: 98 (public debt in percent of GDP for the projection horizon shown).
  - Growth shock scenario: 125.
  - Primary balance shock scenario: 111.
  - Interest rate shock scenario: 104.
  - Combined shock scenario: 114.
  - Real depreciation and contingent liabilities combined scenario: contingent liabilities shock outcome 107.

### REVENUE REFORM, INSTITUTIONAL FRAMEWORK, AND POLICY RECOMMENDATIONS
- Revenue reform measures under development:
  - Simplify and broaden the income tax base; eliminate tax exemptions; review income tax bands; consolidate current levies and introduce a universal social charge.
  - Consider property taxation to broaden and stabilize the tax base relative to stamp duties; in transition to a valuation-based tax, a flat tax rate is under consideration.
- Institutional fiscal framework considerations:
  - Bolster institutional arrangements, favoring a medium-term expenditure framework to reduce uncertainties and constrain excesses in good times.
  - Consider a fiscal rule consistent with the Stability and Growth Pact and a technocratic fiscal council to advise on fiscal risks.
- Staff appraisal and policy priorities:
  - Continue vigorous policy efforts with emphasis on risk management to wean banking sector from public support and stabilize public debt amid gradual domestic recovery and episodic international market tensions.
  - Prepare contingent fiscal measures to meet consolidation targets if unexpected fiscal demands arise.
  - Complete specification and implementation of revenue-enhancing measures, including income tax reform and property taxation reforms.
  - Strengthen institutional fiscal arrangements and accountability mechanisms.

### EXECUTIVE BOARD ASSESSMENT — Conclusions and Recommendations
- Directors’ judgments:
  - Authorities’ decisive measures to support the banking sector and advance fiscal consolidation helped gain policy credibility and stabilize the economy.
  - Speed of recovery likely moderate with relatively limited growth and high unemployment.
  - Ambitious consolidation targets appropriate but require continued resolve and greater specificity.
- Directors’ recommendations:
  - Sustain consolidation and be ready to adopt additional measures if developments are unfavorable.
  - Strengthen oversight, transparency, and communication to sustain market confidence.
  - Move further toward a medium-term budget framework; consider a fiscal rule and establishment of a fiscal council.
  - Prioritize establishment of a special bank resolution regime and strengthen supervisory resources and enforcement powers.
  - Advance NAMA’s market transactions strategy, provide narrowly-targeted homeowner support where needed, and pursue strategic, market-oriented banking sector restructuring.

*Source: IMF staff report for the 2010 Article IV Consultation with Ireland.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### I. Retaining Credibility

- Authorities have implemented aggressive measures to stabilize the economy and gain policy credibility:
  - Implementation of the National Asset Management Agency (NAMA) to transfer distressed property development and commercial real estate assets from banks.
  - Initiation of banks’ capital enhancement.
  - Ambitious fiscal consolidation proceeding as planned.
- Policy credibility has partially insulated Ireland from market pressures; sovereign spreads have risen significantly on days of intense adverse international sentiment but otherwise allowed policy trajectory to proceed.
- Risks and constraints on the path to stability and recovery:
  - Recovery prospects are weighed down by correction of pre-crisis imbalances (rapid credit growth, inflated property prices, high wage and price levels).
  - Exports are likely to lead the recovery but will have limited domestic spillovers because of low domestic value-added, high capital intensity, and repatriation of profits by multinationals.
  - Decline in domestic price levels needed to restore competitiveness creates deflationary demand risks in the interim.
  - Deleveraging and banks’ risk aversion will constrain lending, at least in 2010–11.
  - Unforeseen fiscal needs and episodes of heavily bunched banks’ funding needs could generate unwelcome pressures.
- Policy implications for preserving credibility:
  - Orderly disposal of NAMA’s assets to help restore the commercial property market.
  - Attention to distress among economically-vulnerable homeowners.
  - Reshaping the banking sector to a new strategic vision and business model.
  - Ambitious redesign of regulatory and supervisory system requires a special bank resolution framework.
  - Efforts will facilitate gradual exit from the government’s guarantee of bank liabilities.
  - Planned fiscal consolidation requires sustained implementation and, if insufficient, should be supplemented by additional measures.
  - A stronger fiscal framework would guide consolidation as crisis urgency abates.
- Staff visit: Team visited Dublin during May 20–31, 2010.

*Source: IMF staff report EXECUTIVE SUMMARY*

### II. The Near-Term Growth and Employment Outlook

#### A. Output — recent developments and short-term outlook

- 2009 performance:
  - Irish GDP fell by 7.1 percent in 2009.
  - GNP fell by 11.3 percent in 2009.
  - The economy appeared to stabilize in 2009:Q3; q-o-q contraction of 2.3 percent in 2009:Q4.
  - Domestic consumption and investment (particularly construction) declined; net exports contributed positively as imports contracted more than exports.
- Drivers of the downturn:
  - Pre-crisis growth concentrations in construction and financial intermediation (share of GDP to more than 15 percent) reversed during contraction.
  - Overvalued properties and an unsustainable private credit-to-GDP ratio unwound, amplifying losses in employment and consumer confidence.
- 2010 staff projection and uncertainty:
  - Staff projects GDP for 2010 to be ½ percent lower than in 2009, with a q4-on-q4 increase of about 2 percent.
  - Short-term indicators mixed: industrial production pulled back after a sharp January rise; goods exports recovering from weak H2 2009; sentiment measures improved but did not reflect recent financial tensions; recent unemployment data disappointing.
  - Authorities have not recently updated official projections but see scope for a larger cyclical rebound in 2010–11.
- External linkages and spillovers:
  - Ireland’s openness exposes it to international shocks and contagion; policy credibility has helped limit spillovers.
  - Irish-based banks’ exposure to Greece was $8.5 billion (3½ percent of GDP) at end-2009; exposure of Irish banks covered by the government’s guarantee is of the order of €40 million.

#### B. Employment — current state and outlook

- Unemployment has risen sharply:
  - Headline unemployment increased from 4½ percent in 2007 to 13 percent in 2010:Q1.
  - Broader measures including marginally-attached workers put unemployment closer to 17 percent.
  - Headline unemployment is likely to peak this year at 13¾ percent before declining to 9½ percent by 2015.
- Nature of unemployment:
  - Large increases reflect structural changes from unwinding the boom; sharpest employment decreases in construction and manufacturing.
  - Some lost jobs may not return, with long-duration unemployment risking depreciation of human capital.
- Emigration and labor participation:
  - Emigration has eased labor market pressures; staff estimates unemployment could have been as much as 2 percentage points higher without emigration (based on 2010:Q1 Labor Force Survey).
  - Labor force participation fell mainly among the young; participation also fell among older males, raising concerns about reattachment to the labor force.
  - Long-term unemployment has more than doubled since 2007 and could become a persistent policy challenge.

### III. The Strength and Shape of the Recovery

- Overall recovery constrained by ongoing imbalances:
  - Staff projects GDP growth to gradually recover to 3½ percent by 2015.
  - Potential growth is expected to rise from the current 1 percent to about 2½ percent by 2015 as internal imbalances are corrected.
  - Loss in potential output is expected to be permanent relative to pre-crisis trend; estimates indicate output was above potential by 5–7 percent in 2007 and output gap in 2009 ranges from -3½ to -7 percent.
  - The economy may operate in a regime of relatively-modest potential growth and high unemployment reinforcing each other.
- Structural note:
  - Pre-crisis rapid expansion in house prices and construction (as in Spain and Ireland) led to larger negative output gaps and greater deflation risk during adjustment.
- Policy and structural implications:
  - Correction of imbalances will produce a weaker and more protracted recovery relative to peers.
  - Restoring competitiveness requires price declines but risks deflationary demand effects that need management.
  - Financial-sector repair and improved access to lending are critical to transmission of recovery to domestic demand.

#### A. An Export-Led Recovery? (summary points from discussion)

- Exports are the most promising source for sustained recovery provided competitiveness gains continue.
- Limitations of an export-led recovery:
  - Dynamic exports have relatively low domestic value-added.
  - High capital intensity of export sectors implies limited employment spillovers.
  - Sizeable repatriation of profits by multinationals reduces domestic income gains.
- Net effect: export recovery will support output but provide only limited employment and domestic-demand stimulus.

*Source: IMF staff report EXECUTIVE SUMMARY*

### 11. Irish exports fell less in the recent global downturn than did exports elsewhere.

### 11. Irish exports fell less in the recent global downturn than did exports elsewhere.

### Export performance and composition
- Irish export volumes contracted by 2¼ percent in 2009, compared with a 14¼ percent fall in German export volumes in 2009.
- A large chemicals export base (notably pharmaceuticals) supported exports even as office machinery exports fell sharply.
- Exports are expected to lead the recovery given weak domestic demand; the question remains whether exports will generate a new dynamic that raises the economy to a higher performance trajectory.
- About two-thirds of Irish exports are destined for Europe.
- By staff projections, annual export growth will rise only gradually to 4–5 percent in 2013–15.
- For faster export growth, continuing identification of new niches to counter lower-wage competition would be required.

### Inward foreign investment and trade structure
- Multinationals, particularly from the United States, substantially raised their presence in Ireland in the late 1990s, linking Ireland to global supply networks of electronics and chemical products.
- Ireland’s export-to-GDP ratio rose alongside an increase in the import-to-GDP ratio, reflecting the heavy import content of exports.
- The departure of Dell to Poland in early 2009 exemplified loss of edge in low-end manufacturing.
- Export growth has been sustained more by the repositioning of Ireland as a service exporter and “knowledge hub”; exports of services continued to grow at a fast pace while exports of goods grew much slower.

### Competitiveness, unit labor costs, and internal devaluation
- Recent declines in unit labor costs have reduced the gap with euro area countries, but the decline has been driven mainly by productivity improvements reflecting compositional shifts (contraction of the relatively-unproductive construction industry).
- Staff was concerned that productivity increases may not continue; hence the decline in unit labor costs to competitive levels is not yet assured.
- The CGER estimates suggest the real effective exchange rate is broadly in line with medium-term fundamentals.
- The high Irish price and wage levels will require a period of “internal devaluation” over the next few years to support export growth.
- The authorities expect wage compression to continue on account of continuing weakness in and flexibility of the Irish labor market.

### Deflationary drag and price dynamics
- Prices have fallen: the annual pace of price decline was 2½ percent in April, moderating to 1.9 percent in May (largely due to higher energy costs).
- The fraction of components of the price index across which prices are falling peaked at 80 percent in April and remained at 67 percent in May.
- Staff projects a 1.8 percent decline in prices this year and a further fall of 0.5 percent in 2011.
- An index capturing deflationary pressure ranks Ireland as the most vulnerable country to deflationary pressures (Deflation vulnerability indicator, 2009 Q4).
- Real interest rates have risen sharply following the crisis after being especially low during the boom.
- The authorities view staff’s focus on domestic demand as unduly influenced by larger economies and emphasize that exchange rate movements and short-run energy and food price increases would prevent further deflation in Ireland’s small open-economy setting.

### Debt overhang and implications for recovery
- Household and corporate leverage increased substantially during the boom, implying that deflation will slow the pace of recovery as debtors repay unchanged nominal debts in an environment of falling prices and higher real interest rates.
- Households: Financial Liabilities to Net Disposable Income rose sharply in the boom years (series shown for 2003–2008).
- Non-financial corporations: Loans to GDP rose to high levels (series shown for 2003–2008).
- Improvements in the trade balance have tended to lead to higher income outflows on account of direct investment.

### Macro-financial linkages and banking sector risks
- Bank nonperforming loans (NPLs) increased from ¾ percent at end-2007 to 9 percent at end-2009 and can be expected to increase further.
- The ability to provision for NPLs has declined sharply; bank provisions to NPLs have been falling (comparative series shown vs. UK and Spain).
- Capital ratios for large Irish banks declined while eurozone bank capital ratios rose since the crisis.
- Banks’ reliance on wholesale funding and high loan-to-deposit ratios have yet to be corrected significantly.
- Authorities estimate over €70 billion (44 percent of GDP) of banks’ obligations will mature by September this year; this includes long-term debt, commercial paper, certificates of deposit, and interbank deposits.
- The Eligible Liabilities Guarantee scheme will cover new issuance of up to five years’ maturity, subject to review by the European Commission; depending on market conditions, an extension of this scheme may be needed.
- Irish banks have been heavy users of ECB liquidity facilities; ECB provision of liquidity peaked in the first half of 2009 and has since come down but remains high.
- Retail bank deposits have been either flat or declining.

### Credit conditions and macro effects
- Banks tightened credit standards for firms continuously since mid-2007; standards for mortgage and consumer credit tightened and are stabilizing.
- Observed decline in net flow of credit is consistent with tighter lending standards; distinguishing supply and demand effects is difficult.
- Box 3 statistical findings:
  - A fall of 0.5 in the ratio of bank stock prices relative to the overall stock market is estimated to cause a gradual tightening of consumer and corporate lending standards by about 1/3 and 1, respectively, on a scale between one and five.
  - The average quarterly tightening of lending standards during the latest cycle has been approximately 0.1, estimated to cause credit contraction of 0.15 percent of GDP for consumer loans and 0.5 percent of GDP for mortgage and corporate loans.
  - Relative to gross new lending in the last quarter of 2009, this corresponds to about 5 percent of consumer loans, 3 percent of mortgage loans and 1 percent of corporate loans.
  - Credit availability effects:
    - An increase in consumer credit of one euro is associated with increased consumption of 80 cents with a one-quarter lag and a further 80 cents after one year.
    - A corporate loan of one euro is associated with increased investment of 30 cents contemporaneously and an additional 40 cents after three quarters.
    - Mortgage credit has a significant contemporaneous effect on house prices, which indirectly affects residential investment.

*Source: WEO, UN Comtrade, Statistics Office Ireland, Haver Analytics, IMF staff calculations, and material in the source PDF.*

### 25. Recognizing these developments, the authorities have raised targets for core-

### 25. Recognizing these developments, the authorities have raised targets for core-

### Financial sector risks and capital targets
- Authorities set a target ratio of 8 percent for core-Tier 1 capital (of which 7 percent is to be equity capital), taking into account losses arising from the ongoing transfer of loans to NAMA as well as future expected losses on non-NAMA assets until 2012.
- Required capital injections will ensure that banks’ core-Tier 1 capital would remain above 4 percent in a stress scenario.
- Recent rights issue by one major bank indicates some private capital is returning, but authorities are committed to fill remaining gaps so bank capital will not be a constraint on lending.
- Deleveraging to reduce the loan-to-deposit ratio and banks’ risk aversion are likely to constrain lending and the pace of economic recovery in 2010–11.
- Downside risks: higher than expected losses; uncertainties in global regulatory trends; renewed financial market tensions that may restrict access to funding.
- Targets for SME lending imposed on two major banks in 2010–11 could have adverse effects on credit quality and require strong prudential safeguards, as nonperforming loans in this sector have grown rapidly.

### IV. FINANCIAL SECTOR: RESTRUCTURING AND STABILITY — Overview
- Two-part agenda: (A) restructuring to address continued fallout from the crisis; (B) strengthen financial stability framework to limit future instability.
- Objective: together these measures should help phase out government guarantees of bank liabilities.

### A. Restructuring — key actions
- NAMA should schedule an orderly disposal of the property assets acquired with the aim of achieving the best possible return for the taxpayer over a 7–10 year timeframe.
- Goal: reduce the large overhang of property in state hands, restart market transactions, and normalize the property market rather than time the market.
- Lesson from other asset management companies: sound and transparent process for asset sales is needed, but moving ahead with early sales is important.
- Governance: NAMA’s independent board strengthens governance; implementing oversight provisions is vital given government’s large presence in the property market.
- Bank restructuring: authorities focused on bank-by-bank restructuring of banks benefiting from government support; disposal of noncore assets is central; in one case a “good bank/bad bank” split is contemplated.
- Strategic unit within the National Treasury Management Agency mandated to foster a market-oriented approach to achieve a viable and competitive banking system.

### Box 4 — The National Asset Management Agency (NAMA) — factual summary
- NAMA established in late 2009 to take over distressed property-development and commercial real estate assets from five of the banks covered by the government’s guarantee on banks’ liabilities.
- Under the completed first tranche, NAMA has acquired loans with a book value of €15.3 billion for about €7.7 billion, representing an average discount of 50 percent.
- In total, about €81 billion worth of loans are to be acquired at a deep discount by the end of this year.
- Participating institutions receive government-guaranteed securities in return for the assets purchased by NAMA.
- Assuming an average discount of 50 percent, NAMA would ultimately issue about €41 billion of securities in total, up to 5 percent of which would not have to be honored if the proceeds from the asset sales fall short.
- Purchase and management of acquired assets is delegated to a Special Purpose Vehicle with 51 percent private ownership but under NAMA’s control.
- For this reason, the NAMA-issued securities are to be treated as off-balance sheet in the Irish budget.
- A contingent liability—of 25 percent of GDP—will be extinguished if NAMA recovers its outlays.
- Effects for banks: loans sales reduce uncertainty about balance sheets and increase liquidity reserves; replacing risky property-related loans with risk-free NAMA bonds reduces banks’ risk-weighted assets and improves capital adequacy.
- Capital shortfalls due to NAMA discounts are being met by a combination of private and public capital injections.

### Support for homeowners and personal insolvency
- Increasing arrears and reschedulings: Financial Regulator cautioned homeowner distress may be the “biggest legacy” of the crisis.
- Regulator required banks to wait 12 months from when arrears arise to initiate repossession on a primary residence if the borrower is engaged in restructuring arrangements.
- Government programs: assist with interest payments for mortgages originated in recent years and interest supplement to the neediest.
- Authorities note further support measures raise moral hazard and perception of unfairness.
- A working group on Mortgage Arrears and Personal Debt Review is studying available options.
- Staff proposal: with persisting unemployment, additional support measures may be needed for a narrowly-targeted group of vulnerable homeowners; banks with capital bolstered by the state could absorb initial costs, perhaps using the welfare system to identify eligible beneficiaries.
- Personal insolvency regime: move to an optional out-of-court resolution mechanism under discussion, possibly applying to small businesses as well as individuals.
- Staff pointed out that a repayment period of three to five years and removal of overly punitive elements such as imprisonment for nonpayment of civil debts would bring the regime more in line with European practices.

### B. Financial Stability — regulatory and supervisory reforms
- Progress: targets for higher and better quality capital; focus on improved liquidity management.
- Measures being advanced: strengthen governance of banks’ boards; raise fitness and probity requirements of senior managers and board members; create safeguards against related-party lending.
- Institutional changes: de facto consolidation of the Central Bank and the Financial Regulator; bill to formalize this arrangement (including more accountability of the Regulator); new risk-based supervisory approach; plans to upgrade onsite supervision.
- Key challenge: ensure timely implementation through adequate resources and enhanced enforcement powers.

### Bank resolution and crisis-preparedness
- Need for a special bank resolution framework: timely bank resolution triggered by more prudent thresholds requires legal framework for broader resolution tools (establish bridge banks, assume liabilities, purchase assets).
- Some European countries have begun to establish special resolution regimes, with the U.K. taking the lead.
- Authorities recognize merits of a special bank resolution framework; delay reflects discussion on choices suitable for Ireland.
- Staff recommendation: early action to introduce a special bank resolution mechanism is needed to meet contingencies and strengthen the stability framework.
- Deposit guarantee scheme operational arrangements are being bolstered; authorities recognize need for additional premiums from banks when they return to greater normalcy.

### Financial stability charge and taxation options
- Proposal elements:
  - A risk-adjusted levy, tied to a credible resolution mechanism, to provide resources for a resolution fund for future crises.
  - A financial activities tax, levied on profits and remuneration (of senior executives), to contribute to general revenues and reduce sector size/systemic risk.
- Authorities note such tax measures are controversial and Ireland would be guided by evolving international practice; initiatives may need to be deferred until more normal conditions apply.

### V. THE FISCAL OUTLOOK AND CONSOLIDATION AGENDA — The outlook
- Authorities acted to take additional measures and raise ambition of fiscal consolidation goals in response to a large structural deficit.
- Strong upfront measures expected to yield a net adjustment of 5½ percent of GDP over 2009–10.
- 2010 budget focused on expenditure measures: reductions in the wage bill, social welfare benefits, and public services spending (particularly health care and education).
- Public service pensions scope reduced for new entrants, starting in 2010.
- Revenue measures included a carbon tax.
- Staff note deterioration in fiscal balance is particularly large in Ireland (chart referenced in source).

### Box 5 — Asset booms and structural fiscal balances — key points
- Revenues from capital taxes and stamp duties increased from 2 percent in 2000 to 4 percent of GDP in 2007; VAT increased one percentage point of GDP to 7½ percent over that period.
- At their peak in 2007, these revenues represented over a third of total current revenues.
- After fiscal adjustment of 5½ percent of GDP, Irish structural deficit is expected to decline to 8½ percent of GDP in 2010.
- Note: estimates of structural balances across countries are not directly comparable.

### Fiscal projections, risks, and financing
- Authorities project the 2010 deficit to be 11½ percent of GDP.
- Staff projects a deficit of 11.9 percent of GDP in 2010 due to lower nominal 2009 GDP and weaker growth projection.
- Accounting treatment of government’s equity injections into troubled banks could raise the 2010 headline deficit substantially.
- Re-classification example: a capital injection (2½ percent of GDP) reclassified as a capital transfer raised the 2009 deficit to 14¼ percent of GDP.
- In the first half of 2010, government issued promissory notes worth 8½ percent of GDP to increase capital in one bank and two building societies; if considered capital transfers, the 2010 deficit would increase by this amount.
- A further possible capital injection of 5 percent of GDP would add correspondingly to the 2010 deficit.
- Remaining sovereign financing need in 2010 is limited: average maturity of Irish treasury bonds is 7½ years; for 2010 about three quarters of planned government bond issuance (€20 billion) had been obtained as of June.
- Annual financing needs in 2011–12 projected at about the 2010 level.
- Authorities maintain sizeable cash balances, financed by short-term debt, which could act as a buffer against temporary difficulties in issuing long-term debt.
- Staff supports the consolidation plan through 2014 but cautions required adjustment may be larger than authorities project.
  - Authorities’ plan (December 2009 Stability Programme Update): reduce deficit to below 3 percent of GDP by 2014.
  - Plan envisages fiscal adjustment of 4½ percent of GDP over 2011–14, of which about 1 percent of GDP represents reductions in capital expenditures.
  - Staff’s macroeconomic projections imply required medium-term adjustment could be larger: staff estimates adjustment need over 2011–14 would be 6½ percent of GDP, 2 percentage points of GDP higher than the authorities’ estimate.
- Staff and authorities concur on importance of meeting targets within agreed timeframe.

### Selected fiscal projection table highlights (Percent of GDP, as in source)
- Revenue: 2009 = 33.6; 2010 = 34.5; 2011 = 34.9; 2012 = 36.4; 2013 = 36.8; 2014 = 36.9
- Tax revenue (incl. capital tax): 2009 = 21.8; 2010 = 21.1; 2011 = 22.0; 2012 = 23.5; 2013 = 23.9; 2014 = 24.1
- Expenditure: 2009 = 47.9; 2010 = 46.4; 2011 = 46.0; 2012 = 45.0; 2013 = 44.0; 2014 = 42.8
- Interest payments: 2009 = 2.1; 2010 = 2.8; 2011 = 3.3; 2012 = 3.8; 2013 = 4.1; 2014 = 4.4
- Capital expenditure: 2009 = 7.7; 2010 = 5.1; 2011 = 4.8; 2012 = 4.8; 2013 = 4.8; 2014 = 4.8
- Overall balance: 2009 = -14.3; 2010 = -11.9; 2011 = -11.1; 2012 = -8.6; 2013 = -7.3; 2014 = -5.9
- Authorities target (overall balance): 2010 = -11.6; 2011 = -10.0; 2012 = -7.2; 2013 = -4.9; 2014 = -2.9
- Structural balance (in percent of potential GDP): 2009 = -9.8; 2010 = -8.2; 2011 = -6.8; 2012 = -5.9; 2013 = -5.6; 2014 = -5.2
- General government debt: 2009 = 64.0; 2010 = 86.2; 2011 = 94.7; 2012 = 96.9; 2013 = 97.5; 2014 = 97.7

### Debt trajectory and contingent liabilities
- Staff projects government debt to increase steadily until 2014, but to stabilize below 100 percent.
- Eurostat preliminary advice: debt issued by NAMA’s privately-owned Special Purpose Vehicle does not affect general government debt, although it would represent a contingent liability of more than 25 percent of GDP in 2010.

### Consolidation strategy and expenditure focus
- Expenditure savings remain central to achieving consolidation targets.
- Recent expenditure commission identified potential reductions yielding savings of €5.3 billion (3½ percent of GDP), of which about €2 billion have been implemented in the 2010 budget.
- Capital and multi-annual spending reduction plans indicate size of adjustment needed but lack sufficient specificity.
- Initial steps towards establishing a medium-term framework have been taken.
- Efficiency savings expected from ongoing public services modernization, particularly in health and education.
- A draft public service agreement ratified by labor unions envisages reduction in number of public service employees through nonreplacement and flexible redeployment.
- Social welfare transfers were reduced in the previous budget; entitlement reforms could generate further savings.

*IMF staff report excerpt as provided in the source content.*

### 41. The authorities recognize that revenue enhancement should contribute to the

### 41. The authorities recognize that revenue enhancement should contribute to the consolidation. Taking into account the recommendations of the tax commission and consistent with staff advice, the authorities are currently developing proposals to reform income taxation, with the aim to simplify and broaden the income tax base. The reform would include eliminating tax exemptions, reviewing the income tax bands, consolidating the current levies and introducing a universal social charge. The authorities agreed that property taxation would also help broaden the tax base while at the same time making it more stable than the current system of stamp duties. In the transition to a valuation-based tax, a flat tax rate is under consideration.

### Revenue reform and tax policy
- Reform objectives and instruments:
  - Simplify and broaden the income tax base.
  - Eliminate tax exemptions.
  - Review the income tax bands.
  - Consolidate the current levies and introduce a universal social charge.
  - Consider property taxation to broaden and stabilize the tax base relative to stamp duties.
  - In the transition to a valuation-based property tax, a flat tax rate is under consideration.

- Role in consolidation:
  - Revenue enhancement is explicitly intended to contribute to fiscal consolidation.

### Institutional fiscal framework
- Motivation:
  - Establish an institutional process to reinforce collective commitment to stable public finances.
  - Authorities recognize the risk of “consolidation fatigue” and potential fraying of social cohesion needed to complete consolidation.

- Considered institutional measures:
  - Bolstering institutional arrangements, with particular favor toward a medium-term expenditure framework to reduce uncertainties and constrain excesses in good times.
  - Consideration of a fiscal rule consistent with the Stability and Growth Pact to create a public metric for sound public finances.
  - Consideration of a technocratic fiscal council to advise on risks underlying public finances.
  - Staff view: despite limitations, fiscal rules and councils would enhance policy credibility now and in the future.

### Staff appraisal — macroeconomic outlook and policy priorities
- Growth and labor market projections:
  - GDP expected to resume growing this year, but 2010 real GDP expected to be about ½ percent lower than in 2009.
  - GDP growth should increase gradually to about 3½ percent by 2015.
  - Unemployment should decline from a peak of about 13¾ percent this year to still high 9½ percent.

- Policy priorities and risk management:
  - Continue vigorous policy efforts with emphasis on risk management.
  - Primary challenge: wean banking sector from public support and stabilize public debt amid gradual domestic recovery and episodic international market tensions.
  - Active risk management needed due to potential unforeseen fiscal shocks and heavily bunched banks’ funding needs.
  - Commitment to goals requires mechanisms for accountability and oversight to anticipate and contain slippages and surprises.

- Fiscal consolidation assessment:
  - 2010 budget stays on course toward consolidation goals; plan relies centrally on expenditure reduction complemented by revenue enhancement through a broader tax base.
  - Authorities should be prepared with additional measures to meet targets in case of unexpected fiscal demands.
  - Commitment to consolidation path should be reinforced by greater specificity on the measures foreseen.

### Financial stability and banking sector priorities
- Restructuring priorities to address crisis fallout:
  - NAMA’s task: restore the commercial property market through an orderly schedule of market transactions.
  - Provide narrowly-targeted support to economically-vulnerable homeowners, likely via recapitalized banks.
  - After bank-by-bank restructuring, adopt a strategic, market-oriented view to reshape the banking sector.

- Progress and remaining gaps:
  - Much progress on the financial stability agenda has been made.
  - A special bank resolution scheme remains an important gap and requires immediate attention.
  - Formalization of the de facto combination of the Central Bank and the Financial Regulator is underway.
  - New assertive, risk-based supervisory approach welcomed; needs further resources and enforcement powers.

### Fiscal projections, key indicators, and risks (selected figures preserved exactly)
- General government debt path:
  - General government debt series (selected values from tables): 27.3, 24.9, 25.0, 43.9, 64.0, 86.2 (in percent of GDP) across the period shown.

- General government balance and primary balance (in percent of GDP):
  - General government balance: 1.6, 2.9, 0.1, -7.3, -14.3, -11.9 (actual and projections as presented).
  - Primary balance: 2.7, 3.8, 0.9, -6.2, -12.2, -9.1.

- Revenue and expenditure shares (in percent of GDP):
  - Current revenue (of which): 33.7, 35.3, 34.6, 32.9, 32.5, 33.2 (selected series).
  - Tax revenue (including taxes on capital): 25.8, 27.2, 26.2, 23.7, 21.8, 21.1.
  - Social security receipts: 4.5, 4.6, 4.8, 5.1, 5.5, 5.7.
  - Current expenditure: 28.5, 28.8, 29.9, 34.1, 40.2, 41.3.
  - Interest payments: 1.0, 0.9, 0.8, 1.0, 2.1, 2.8.

- Macroeconomic projections and medium-term scenario (selected):
  - Real GDP (percent change): 6.2, 5.4, 6.0, -3.0, -7.1, -0.6, 2.3, 2.5, 2.9, 3.2, 3.5.
  - Output gap (percent of potential output): 0.6, 2.5, 6.5, 2.8, -5.0, -6.3, -4.9, -3.5, -2.1, -0.9, 0.0.
  - Growth in nominal GDP: 8.7, 9.0, 7.4, -4.2, -10.1, -2.6, 3.1, 4.4, 4.8, 5.0, 5.3.

- Financial sector indicators (selected):
  - Irish resident private sector credit annual change: 28.8, 25.9, 17.0, 7.3, -7.6 (series shown).
  - Non-performing loans (in percent of total loans): 0.9, 0.8, 0.6, 0.7, 0.7, 2.6, 9.0.
  - Regulatory capital to risk-weighted assets of domestic banks (in percent): 13.9, 12.6, 12.0, 10.9, 10.7, 10.6, 10.9.
  - General government bond yields (10-year, end-period): 3.3, 3.5, 3.3, 4.0, 4.5, 4.4, 4.9 (selected series).

### Summary recommendations and next steps
- Complete specification and implementation of revenue-enhancing measures, including income tax reform and property taxation reforms, to broaden and stabilize the tax base.
- Strengthen institutional fiscal arrangements:
  - Implement a medium-term expenditure framework with expenditure ceilings.
  - Consider a fiscal rule consistent with the Stability and Growth Pact.
  - Consider establishment of a technocratic fiscal council to advise on fiscal risks.
- Prepare contingent fiscal measures to meet consolidation targets in case of unexpected fiscal demands.
- Prioritize establishment of a special bank resolution regime and strengthen supervisory resources and enforcement powers.
- Advance NAMA’s market transactions strategy, provide narrowly-targeted homeowner support where needed, and pursue strategic, market-oriented banking sector restructuring.

*Source: Department of Finance and staff projections.*

### Appendix I. Ireland: Public Sector and External Sustainability

### Appendix I. Ireland: Public Sector and External Sustainability

### Fiscal sustainability: recent developments and baseline projections
- General government debt:
  - Increased from 25 percent of GDP in 2007 to 64 percent of GDP in 2009.
  - Baseline projection: rise to 86 percent of GDP in 2010, reflecting the primary deficit (9 percent of GDP) and fiscal outlays for bank recapitalization (8½ percent of GDP).
  - Medium-term baseline: debt ratio stabilizes at about 98 percent of GDP in 2014–15.
- Primary balances and fiscal dynamics:
  - Primary deficit in 2010: 9.1 (percent of GDP) in the Table A1 projection series.
  - Identified debt-creating flows and contributions (selected):
    - Change in public sector debt in 2010: 22.2 (percent of GDP).
    - Identified debt-creating flows (2009→2015 trajectory): 13.6 (2010), 8.5 (2011), 4.6 (2012), 2.8 (2013), 1.2 (2014), -0.1 (2015) (percent of GDP).
    - Automatic debt dynamics contribution in 2010: 4.5 (percent of GDP).
- Debt-stabilizing primary balance:
  - Debt-stabilizing primary balance shown as -0.3 (percent of GDP) for the projection horizon in Table A1.
- Scenario analysis and sensitivity:
  - Under a scenario where the primary balance is kept constant at the 2009 level, general government debt would reach 125 percent of GDP in 2015.
  - Debt sustainability is sensitive to exogenous macroeconomic shocks; bound tests (Figure A1) illustrate effects of growth, primary-balance, and interest-rate shocks and combinations including real depreciation and contingent-liabilities shocks.
- Key policy message:
  - The analysis underscores the importance of continued fiscal consolidation to reduce deficits and stabilize public debt.

### External sustainability: net investment position and drivers
- Net external position:
  - From being balanced in 2007, the net external position went into a 60 percent of GDP deficit in 2008.
  - For FDI, assets and liabilities remained largely balanced on a consolidated basis.
- Main drivers of deterioration:
  - Increase in monetary financial institutions’ foreign liabilities was not matched by an increase in foreign assets.
  - International Financial Services Center (IFSC) concentration in 2008:
    - Accounted for 75 percent of total foreign assets.
    - Accounted for 70 percent of total foreign liabilities.
- Table A2 selected historical indicators (in percent of GDP unless otherwise noted):
  - Change in net investment position (selected years): -58.5 (2000), -7.3 (2001), -2.7 (2002), -2.2 (2003), 2.1 (2004), -6.6 (2005), 19.3 (2006), -14.1 (2007), -39.0 (2008).
  - Current account balance contribution to change in net investment position (selected years): -0.4 (2000), -0.6 (2001), -1.0 (2002), 0.0 (2003), -0.6 (2004), -3.5 (2005), -3.6 (2006), -5.3 (2007), -5.2 (2008), -2.9 (2009).

### Projections, key macro-fiscal assumptions, and alternative scenarios
- Baseline public sector debt path (selected years, percent of GDP from Table A1):
  - 2009: 64.0
  - 2010: 86.2
  - 2011: 94.7
  - 2012: 96.9
  - 2013: 97.5
  - 2014: 97.7
  - 2015: 97.5
- Alternative scenarios (Table A1):
  - Scenario with key variables at their historical averages: public sector debt path shows 86.2 (2010), 84.1 (2011), 79.8 (2012), 75.6 (2013), 72.7 (2014), 70.9 (2015).
  - Scenario with no policy change (constant primary balance) in 2010–2015: public sector debt path shows 86.2 (2010), 96.0 (2011), 102.6 (2012), 109.0 (2013), 116.7 (2014), 125.5 (2015).
- Key macroeconomic and fiscal assumptions underlying the baseline (selected series from Table A1):
  - Real GDP growth (in percent): 6.2 (2005), 5.4 (2006), 6.0 (2007), -3.0 (2008), -7.1 (2009), -0.6 (2010), 2.3 (2011), 2.5 (2012), 2.9 (2013), 3.2 (2014), 3.5 (2015).
  - Average nominal interest rate on public debt (in percent): 3.9 (2005), 3.6 (2006), 3.6 (2007), 4.0 (2008), 4.3 (2009), 4.3 (2010), 3.9 (2011), 4.2 (2012), 4.4 (2013), 4.8 (2014), 5.0 (2015).
  - Average real interest rate (in percent): 1.5 (2005), 0.1 (2006), 2.4 (2007), 5.1 (2008), 7.5 (2009), 6.2 (2010), 3.1 (2011), 2.3 (2012), 2.5 (2013), 3.0 (2014), 3.2 (2015).
  - Inflation rate (GDP deflator, in percent): 2.4 (2005), 3.5 (2006), 1.3 (2007), -1.2 (2008), -3.2 (2009), -1.9 (2010), 0.8 (2011), 1.9 (2012), 1.8 (2013), 1.8 (2014), 1.8 (2015).
  - Growth of real primary spending (deflated by GDP deflator, in percent): 7.1 (2005), 7.5 (2006), 13.5 (2007), 11.8 (2008), 5.7 (2009), -5.4 (2010), 0.2 (2011), -1.1 (2012), -0.1 (2013), -0.8 (2014), 0.2 (2015).
  - Primary deficit (percent of GDP): -2.7 (2005), -3.8 (2006), -0.9 (2007), 6.2 (2008), 12.2 (2009), 9.1 (2010), 7.8 (2011), 4.8 (2012), 3.2 (2013), 1.5 (2014), 0.2 (2015).
- Gross financing need (percent of GDP, Table A1):
  - 2009: 14.3
  - 2010: 22.0
  - 2011: 20.8
  - 2012: 17.9
  - 2013: 13.9
  - 2014: 10.1
  - 2015: 7.8

### Sensitivity and stress tests
- Bound tests (Figure A1) display the impact on public debt of permanent one-half standard deviation shocks to:
  - Real GDP growth (growth shocks).
  - Primary balance (PB shock).
  - Interest rates (i-rate shock).
  - Combined shocks and specific scenarios (e.g., real depreciation and contingent liabilities shocks).
- Illustrative scenario outcomes from Figure A1 (average projections in boxes):
  - Baseline average projection: 98 (public debt in percent of GDP for the projection horizon shown).
  - Growth shock scenario: 125.
  - Primary balance shock scenario: 111.
  - Interest rate shock scenario: 104.
  - Combined shock scenario: 114.
  - Real depreciation and contingent liabilities combined scenario: contingent liabilities shock outcome 107.

### Policy implications emphasized in the source
- Continued fiscal consolidation is essential to reduce the primary deficit and stabilize public debt.
- The fiscal outlook is highly sensitive to macroeconomic conditions and shocks (growth, interest rates, exchange rate, and contingent liabilities), making policy consistency and contingent-liability management critical.
- Addressing banking sector contingent liabilities and monitoring international financial services concentrations (IFSC) are important for external position stability.

*Source: Appendix I. Ireland: Public Sector and External Sustainability (IMF staff calculations and Central Statistics Office data).*

### 2010. The authorities’ multi-year plan is intended to achieve a sustainable fiscal position.

### 2010. The authorities’ multi-year plan is intended to achieve a sustainable fiscal position.

### Executive Board Assessment
- Directors judged that the authorities’ decisive measures to support the banking sector and advance fiscal consolidation have helped gain policy credibility and stabilize the economy.
- Directors encouraged the authorities to sustain these efforts and actively manage risks going forward.
- Directors concurred with staff’s analysis that the speed of the recovery is likely to be moderate with relatively limited growth and high unemployment.
- Directors noted the authorities’ ambitious consolidation targets remained appropriate but their achievement would require continued resolve.
- Directors agreed the consolidation plan would benefit from greater specificity and encouraged readiness to adopt additional measures if developments are unfavorable.

### Vulnerabilities, risks, and communication
- Directors noted vulnerabilities remain elevated as evidenced by continued pressures in sovereign debt and bank funding markets.
- With limited fiscal resources for contingencies, maintaining a steady policy course will require:
  - effective mechanisms for oversight and transparency, and
  - high-quality communication to minimize risks and sustain market confidence.
- Directors recommended moving further towards a medium-term budget framework to reduce uncertainties associated with the consolidation process.
- Directors recommended consideration of:
  - adopting a fiscal rule, and
  - establishing a fiscal council to advise on risks underlying public finances.

### Recovery constraints and structural reform
- Growth prospects are weighed down by the ongoing correction of pre-crisis imbalances.
- The unwinding of imbalances—arising from rapid credit growth, inflated property prices, and high wage and price levels—could limit upside potential.
- Directors noted structural reforms aimed at regaining competitiveness and boosting potential output are necessary to put the recovery on a sustainable track.

### Banking sector actions and financial stability framework
- Directors recognized much progress had been made to strengthen the banking sector but observed a sizeable agenda remains.
- Directors welcomed:
  - the transfer of banks’ distressed property development and commercial real estate assets to the NAMA, and
  - the complementary decision to raise banks’ capital targets.
- Directors noted that the orderly disposal of NAMA’s assets will help restore the commercial property market.
- Directors observed that narrowly-targeted support measures for vulnerable homeowners would limit the economic and social fallout of the crisis.
- Directors welcomed the authorities’ intent to proactively reshape the banking system, stressing the importance of a strategic, but market-oriented, approach.
- Directors emphasized the need to strengthen the financial stability framework and welcomed:
  - recent institutional changes to enhance regulation, and
  - the proposed new risk-based supervisory approach.
- Directors encouraged early action to introduce a special bank resolution mechanism to further strengthen the stability framework and expand contingency tools.

### Selected Economic Indicators (highlights from 2005–2009) 1/
- Real GDP (change in percent): 2005: 6.2, 2006: 5.4, 2007: 6.0, 2008: -3.0, 2009: -7.1
- Real GNP (change in percent): 2005: 5.6, 2006: 6.3, 2007: 4.4, 2008: -2.8, 2009: -11.3
- Domestic demand (change in percent): 2005: 8.6, 2006: 6.1, 2007: 4.1, 2008: -4.4, 2009: -13.9
- Exports of goods and services (change in percent): 2005: 5.2, 2006: 5.1, 2007: 8.6, 2008: -1.0, 2009: -2.3
- Imports of goods and services (change in percent): 2005: 8.4, 2006: 6.5, 2007: 5.6, 2008: -2.1, 2009: -9.3
- HICP (change in percent): 2005: 2.2, 2006: 2.7, 2007: 2.9, 2008: 3.1, 2009: -1.7
- Unemployment rate (in percent): 2005: 4.4, 2006: 4.4, 2007: 4.5, 2008: 6.1, 2009: 11.8

- Public finances (percent of GDP):
  - General government balance: 2005: 1.6, 2006: 2.9, 2007: 0.1, 2008: -7.2, 2009: -14.3
  - Structural balance 2/ (in percent of potential GDP): 2005: -5.6, 2006: -6.1, 2007: -8.1, 2008: -12.0, 2009: -9.8
  - General government debt: 2005: 27.3, 2006: 24.8, 2007: 24.9, 2008: 44.0, 2009: 64.0

- Money and credit (end-period, percent change):
  - M3 3/: 2005: 19.8, 2006: 30.8, 2007: 9.7, 2008: -1.9, 2009: -8.7
  - Private sector credit 4/: 2005: 28.8, 2006: 25.9, 2007: 17.0, 2008: 7.3, 2009: -6.0

- Interest rates (end-period):
  - Three-month treasury bill: 2005: 2.5, 2006: 3.7, 2007: 4.6, 2008: 3.0, 2009: 0.6
  - 10-year government bond yield: 2005: 3.3, 2006: 4.0, 2007: 4.5, 2008: 4.4, 2009: 4.9

- Balance of payments (percent of GDP):
  - Trade balance (goods and services): 2005: 11.7, 2006: 10.3, 2007: 9.8, 2008: 10.1, 2009: 16.9
  - Current account: 2005: -3.5, 2006: -3.6, 2007: -5.3, 2008: -5.2, 2009: -2.9
  - Reserves (in billions of euros): 2005: 0.7, 2006: 0.7, 2007: 0.6, 2008: 0.7, 2009: 1.5

- Exchange rate:
  - Exchange rate regime: Member of euro area
  - Euros per U.S. dollar: 2005: 0.8, 2006: 0.8, 2007: 0.7, 2008: 0.7, 2009: 0.7
  - Nominal effective rate (1999Q1=100): 2005: 104.1, 2006: 104.4, 2007: 107.4, 2008: 113.0, 2009: 112.5
  - Real effective rate (1999Q1=100, CPI based): 2005: 115.4, 2006: 116.0, 2007: 120.1, 2008: 125.6, 2009: 121.9

1/ Based on data until June 18, 2010.  
2/ In percent of potential GDP.  
3/ The methodology used to compile M3 has been amended in line with Eurosystem requirements. Therefore, there is a break in the series.  
4/ Adjusted change, which includes the effects of transactions between credit institutions and nonbank international financial companies and valuation effects arising from exchange rate movements.

*Source: IMF staff report for the 2010 Article IV Consultation with Ireland.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10209.pdf_