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### EXECUTIVE SUMMARY — FOCUS AND NEAR-TERM OUTLOOK
- Ireland’s recovery is robust; priority is to ensure solid growth and job creation is sustained.
- Near-term growth: about 3½ percent y/y in 2015.
- Fiscal and macro-financial priorities:
  - Need for a new post-EDP medium-term fiscal framework as Budget 2016 will likely be Ireland’s first under the preventative arm of the SGP.
  - Rising investment requires increased lending while containing vulnerabilities to protect the durability of recovery.

### RECOVERY, OUTPUT, AND LABOR MARKET
- Output and drivers:
  - Real GDP rose by 4.9 percent y/y in Q1–Q3 2014.
  - Net exports generated two-thirds of this expansion; investment was the other main contributor.
  - Contract manufacturing may have contributed perhaps as much as 2 percentage points to growth in the first three quarters of 2014.
- Employment and consumption:
  - Employment up 5.2 percent from its Q3 2012 trough.
  - Unemployment rate: 10.4 percent in Q4 2014 (peak was 15.1 percent).
  - Long-term unemployed persons down 37 percent from peak; share of long-term unemployed reduced by 7 percentage points to 56 percent.
  - Labor compensation: rose by 6½ percent y/y in the year ended Q3 2014.
  - Household disposable incomes: rose by just over 3 percent in the year to Q3 2014.
  - Retail sales excluding autos: up 3.6 percent y/y in 2014.
  - Fall in energy prices supports household purchasing power.

### PROPERTY MARKETS AND HOUSING
- Commercial real estate (CRE):
  - Capital values rose 30.7 percent y/y in Q4 2014.
  - CRE price levels remain 56 percent below peak and about 30 percent below pre-boom levels.
  - Rental growth: 19.7 percent y/y in Q4 2014.
  - Initial rental yields on commercial property declined from almost 10 percent in early 2012 to 6 percent in Q4 2014.
  - Volume of turnover in Irish CRE in 2014 had 37.5 percent from offshore investors; total turnover in 2014 was higher than mid 2000s.
- Residential housing:
  - House prices rose 16.3 percent y/y in 2014; rise from trough in early 2013 to Q4 2014 was 27 percent.
  - House price levels remain 38 percent below peak.
  - About half of transactions financed in cash; mortgage loan approvals have risen sharply more recently.
  - House completions rose by 33 percent y/y in 2014 but remain just under one-half of estimated household formation needs.
  - Investment (excluding aircraft orders and intangibles) in year to Q3 2014 was up almost 40 percent from two years earlier.
  - Investment to GDP ratio: 16 percent (pre-boom average 22 percent).

### HOUSEHOLD AND CORPORATE BALANCE SHEETS
- Households:
  - Households cut nominal debts by 20 percent from peak.
  - Household debt ratio: 177 percent of disposable income.
  - Household net worth: risen 25 percent from its trough.
  - Household debt concentrated among families with mortgages, 2–3 children, reference person aged 35–44, and in the two top income quintiles.
  - Average interest rate on long-term “tracker” mortgages: 1.05 percent at end 2014.
  - Share of mortgages on primary dwellings in arrears over 90 days: declined to 14.8 percent in Q4 2014 from a peak of 17.3 percent five quarters earlier.
  - Staff estimate: some 4.4 percent of households have mortgages in arrears.
  - Prolonged arrears (over 720 days) rose to just over half of mortgages in arrears over 90 days; arrears outstanding on these mortgages account for 78 percent of total arrears over 90 days.
  - Buy-to-let mortgages in arrears: 29.4 percent of loans.
- Enterprises and SMEs:
  - In the year to Q3 2014, private enterprises (excluding financial intermediaries) repaid outstanding credit at double-digit rates while building deposits at similar rates.
  - SMEs made fewer loan requests; they see greater willingness of banks to lend and face lower loan rejection rates.
  - In H2 2014, lending rates for SMEs moved from the median in the euro area to the 75th percentile.
  - Some 25.4 percent of SME loans are in default, but 41.2 percent by value given high default rates on larger loans.

### BANK HEALTH, NPLs, AND BASEL III TRANSITION
- Bank profitability and drivers:
  - Domestic banks returned to profitability in H1 2014 for the first time since 2008.
  - Operating income growth reflected a fall in costs on deposits and market funding.
  - Provisioning expenses fell by two-thirds in 2014 H1 as impaired assets stabilized and property prices rose.
- Non-performing loans:
  - NPLs remain very elevated at one-quarter of outstanding loans.
  - By Q2 2014 NPLs had fallen 12 percent from their peak in Q3 2013, largely due to write-offs and disposals.
  - Authorities caution headline NPL figures overstate distress because loans expected to be serviced after a workout remain classified as NPLs until remaining debt is written off.
- Capital adequacy and transition:
  - CET1 ratios of domestic banks averaged 13.4 percent in June 2014.
  - Under CRD IV, deferred tax assets and preference shares will be netted out from equity in capital calculations after transition periods, implying further action required for full transition to Basel III rules.

### PROSPECTS, CREDIT OUTLOOK, AND MARKET ACCESS
- Growth projections:
  - 2015: 3½ percent; medium-term easing to about 2½ percent.
  - Export growth reverts to about 4 percent from 2015 (trading partners growth at 2 percent per the latest WEO).
  - Investment growth decelerates modestly but remains brisk; private consumption expected to revive gradually.
  - Inflation rises slowly as unemployment declines towards 8 percent by 2018.
- Credit and funding:
  - Despite strong 2014 growth, bank credit to the private sector declined by about 5 percent y/y.
  - Initial signs of pickup in credit seen in mortgage approvals.
  - Major banks expect loan balances to stabilize and credit to grow broadly in line with GDP in the medium term.
- Market access and sovereign financing:
  - NTMA secured over half of Ireland’s 2015 financing needs and made further early repayments to the IMF equivalent to €3.5 billion in February, bringing total early repayments to 54 percent of Fund lending.
  - Staff’s preliminary estimates indicate the CBI to purchase in the secondary market the equivalent of over half of the bonds the NTMA is expected to issue through September 2016 under the ECB’s PSPP.
  - NTMA raised €4 billion from its first 30-year bond at a yield of 2.1 percent.
- External position signals:
  - EBA approaches suggest the current account and REER are broadly in line with fundamentals; a small undervaluation from Current Account and External Sustainability approaches may reflect retained earnings of redomiciled firms.

### PUBLIC DEBT OUTLOOK, BASELINE, AND SCENARIOS
- Public debt levels:
  - 2013: 123 percent of GDP.
  - 2014 (estimate): 111 percent of GDP.
- Baseline: gross debt falls below 100 percent of GDP in 2018.
- Scenario outcomes:
  - If growth drops 2 percentage points below baseline in 2015–16, debt would rise to 112 percent of GDP in 2017.
  - Combined shock (cumulative worsening of the primary balance by 3.1 percent of GDP over 2015–20 and a 2 percentage point rise in interest rates on new debt): debt would peak at 113 percent of GDP in 2017.
  - Contingent liability shock (10 percent of GDP) combined with a growth shock: gross public debt around 117 percent in 2016–17 before declining to 106 percent by 2020.
- Disposal upside:
  - NTMA valued state holdings in AIB and BoI at about 8 percent of GDP; proceeds from sales could significantly lower public debt.

### FISCAL PERFORMANCE, PROJECTIONS, AND TABLE HIGHLIGHTS
- 2014 estimated deficit: 3.9 percent of GDP (about 4 percent of GDP in text).
- Budget 2015 target: overall deficit of 2.7 percent of GDP.
- Staff projects a decline in the overall deficit of 1.2 percentage point of GDP in 2015, aided by:
  - strong growth: 0.4 percent of GDP,
  - interest bill reductions: 0.4 percent of GDP,
  - one-off revenues: 0.1 percent of GDP,
  - leaving 0.3 percent of GDP in primary structural adjustment.
- Staff estimate: structural primary adjustment 2008–2015 totaled 13 percent of GDP.
- Fiscal outturn table highlights (percent of GDP and changes as presented):
  - Revenue: 55.3, 57.7, 2.3, 1.3
  - Tax revenue: 40.0, 41.3, 1.2, 0.7
  - Social contributions: 11.6, 11.8, 0.2, 0.1
  - Other: 3.7, 4.6, 0.9, 0.5
  - Expenditure: 64.9, 65.9, 1.0, 0.5
  - Current primary: 52.3, 53.2, 1.0, 0.5
  - Capital: 4.5, 5.2, 0.7, 0.4
  - Interest: 8.2, 7.5, -0.7, -0.4
  - Exchequer balance: -9.6, -8.2, 1.4, 0.7
  - General government balance, est.: -8.2, -7.2, 1.0, 0.5

### KEY RISKS (FROM BOX 2 AND STRESS TESTS)
- Financial market volatility and sovereign risk reassessment (Relative Likelihood: H; Impact: M).
- Continued easy international financial conditions raising Irish commercial property prices and potential medium-term vulnerabilities (Relative Likelihood: M; Impact: M).
- Euro area stagnation impeding exports (40 percent of exports to euro area) (Relative Likelihood: H; Impact: M).
- Weak lending revival impeding domestic demand if Basel III constraints bind or slow NPL resolution limits redeployment of capital (Relative Likelihood: —; Impact: —).
- Excessively low inflation slowing decline in private and public debt burdens (Relative Likelihood: H; Impact: L).
- Stress-test highlights:
  - Growth-shock peak debt: 112 percent in 2017 (versus 104 percent baseline).
  - Combined macro-fiscal shock peak debt: 113 percent in 2017; gross financing needs rise to 15 percent of GDP in 2020.
  - Contingent liability + growth shock peak: around 117 percent in 2016–17.

### POLICY RECOMMENDATIONS — FISCAL, FINANCIAL, PROPERTY
- Overall: ensure solid growth and job creation is sustained to reduce unemployment and erode high public debt.
- Fiscal policy:
  - Balance the budget over the cycle through a phased and steady adjustment.
  - Phase adjustment over three years to limit drag on recovery; pace no less than ½ percent of GDP per annum.
  - Dedicate proceeds from disposals of stakes in banks to debt reduction; avoid using revenue overperformance or lower interest bills to fund higher primary spending.
  - Use SGP preventative arm (Expenditure Benchmark and Structural Adjustment rules) to support steady adjustment and prevent one-off supplementary spending from stronger-than-budgeted revenues.
  - Address Irish-specific technical issues in applying EU fiscal rules; base output gap on GDP excluding sectors dominated by MNEs where appropriate.
- Macro-financial / financial sector:
  - Facilitate revival of financing flows to support investment:
    - Tackle prolonged loan arrears more vigorously.
    - Banks should address capital quality issues early to safeguard lending capacity.
    - Explore development of nonbank financing, especially risk capital for SMEs (REITs, closed-end mutual funds, private equity, SME securitizations, covered bonds).
  - Strengthen financial resilience of banks and borrowers and temper property cycles:
    - Maintain momentum under the MART framework; hasten durable resolution in prolonged arrears including timely repossession where feasible.
    - Raise utilization of personal insolvency system, including bankruptcy.
    - Supervision should ensure bank exposures to commercial property risks are appropriately contained; consider macro-prudential instruments (loan-to-value limits, capital add-ons).
    - Recent mortgage origination regulations by the CBI are welcome; differential FTB treatment should be periodically reviewed.
- Property, construction, and rental market reforms:
  - Reduce construction costs; strengthen incentives to complete developments (use-it-or-lose-it permits, vacant site levy); implement Construction 2020 actions including streamlining planning.
  - Reform rental framework to attract professional investment and management, expand supply and quality of rental property, moderate rents, and support labor mobility.

### AUTHORITIES’ VIEWS (SUMMARIZED)
- Authorities agree a clear fiscal framework post-EDP is important and are committed to balancing the budget in structural terms in the medium term.
- Committed to a structural adjustment of at least ½ percent of GDP annually from 2016 onwards.
- Emphasis on expenditure restraint as in the Comprehensive Expenditure Report 2015–17; capital spending remains low at just under 1½ percent of GDP in the medium term.
- Authorities note legislative, administrative, and supervisory efforts to facilitate resolution of distressed loans and express confidence banks’ medium term capital management plans will meet new regulatory requirements.
- Authorities favor developing alternatives to bank lending (ISIF, SBCI) while managing associated fiscal risks.

### STAFF APPRAISAL (KEY POINTS)
- Recovery is off to a good start; priority to maintain solid growth and job creation.
- Combination of prudent fiscal and financial policies needed to support growth while building policy space and private sector resilience.
- Fiscal guidance: seek to balance the budget over the cycle through phased, steady adjustment; close structural deficit over three years at pace no less than ½ percent of GDP annually.
- Composition: both expenditure and revenue measures can and should support adjustment while protecting growth potential and allowing room to rebuild public investment.
- Financial sector: reinvigorate NPL resolution, encourage early actions on bank capital quality, and explore nonbank financing for SMEs.
- Macro-prudential: apply tools proactively as risks evolve; keep the differential treatment of first-time buyers under review.

### ANNEX I — EXTERNAL BALANCE, COMPETITIVENESS, AND ANNEX II — DSA (HIGHLIGHTS)
- External balance:
  - EBA CA approach: CA gap = 5.7-6.5 (Percent of GDP).
  - External sustainability (ES) approach: CA gap = 4.6-5.2 (Percent of GDP).
  - EBA REER approach: REER gap = -6 (percent).
  - Redomiciled firms’ retained earnings contributed an estimated 3.9 percent of GDP to the current account balance for 2013 (at least as much in 2014) and likely explain bulk of estimated positive CA gap.
- Competitiveness:
  - Services exports strong; pharmaceutical sector affected by patent cliff but signs that impact is dissipating.
  - Contract manufacturing complicates comparisons between customs and national accounts export measures.
- Debt sustainability:
  - ESA 2010 revisions and IBRC consolidation raised end-2013 debt to about 123.3 percent; gross public debt estimated to have dropped 12 percentage points to 111 percent of GDP at end-2014.
  - Improved growth and early Fund repayments lower debt trajectory; baseline projects continued decline but vulnerabilities remain large relative to advanced-economy benchmarks (debt benchmark of 85 percent exceeded).
  - Gross financing needs (GFN) projected to peak at 13 percent of GDP in 2020 under baseline; contingent liability shocks could raise GFN above vulnerability thresholds in stress scenarios.

*Source: IMF staff report excerpt (section 9 and related passages).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### FOCUSING ON THE MEDIUM TERM
- Ireland’s recovery has been robust; priority is to ensure solid growth and job creation is sustained.
- Near-term growth prospects appear bright at about 3½ percent y/y in 2015.
- Fiscal outlook and macro-financial policies highlighted:
  - Fiscal adjustment after EDP exit: a new post-EDP medium-term fiscal framework is needed as Budget 2016 will likely be Ireland’s first under the preventative arm of the SGP.
  - Macro-financial policies for durable recovery: rising investment requires increased lending yet vulnerabilities must be contained to protect the durability of recovery.

### RECOVERY IS OFF TO A GOOD START
- Real GDP and drivers:
  - Real GDP rose by 4.9 percent y/y in Q1–Q3 2014.
  - Net exports generated two-thirds of this expansion; investment was the other main contributor.
  - Contract manufacturing (offshore manufacturing under contract) may have contributed perhaps as much as 2 percentage points to growth in the first three quarters of 2014 (Box 1).
- Employment and consumption:
  - Employment is up 5.2 percent from its Q3 2012 trough.
  - Unemployment rate declined to 10.4 percent in Q4 2014 from a peak of 15.1 percent.
  - Number of long-term unemployed persons is down by 37 percent from peak; share of long-term unemployed reduced by 7 percentage points to 56 percent.
  - Labor compensation rose by a strong 6½ percent y/y in the year ended Q3 2014.
  - Household disposable incomes rose by just over 3 percent in the year to Q3 2014.
  - Retail sales excluding autos up 3.6 percent y/y in 2014.
  - Fall in energy prices supports household purchasing power.

### PROPERTY MARKETS AND HOUSING
- Commercial real estate (CRE):
  - Capital values rose 30.7 percent y/y in Q4 2014, the fastest growth since 1999.
  - Price levels for CRE are still 56 percent below peak and about 30 percent below pre-boom levels.
  - Rental growth was 19.7 percent y/y in Q4 2014.
  - Initial rental yields on commercial property declined from almost 10 percent in early 2012 to 6 percent in Q4 2014.
  - By comparison, U.K. initial yield cited at 5.2 percent; 10-year government bond yield cited at 0.84 percent.
  - Volume of turnover in Irish commercial real estate in 2014 had 37.5 percent from offshore investors; total turnover in 2014 was higher than mid 2000s.
- Residential housing:
  - House prices rose 16.3 percent y/y in 2014; rise from trough in early 2013 to Q4 2014 was 27 percent.
  - House price levels remain 38 percent below peak.
  - About half of transactions financed in cash; mortgage loan approvals have risen sharply more recently.
  - House completions rose by 33 percent y/y in 2014 but remain just under one-half of estimated household formation needs.
  - Investment (excluding aircraft orders and intangibles) in year to Q3 2014 was up almost 40 percent from two years earlier.
  - Ratio of investment to GDP is 16 percent, compared with a 22 percent pre-boom average.

### HOUSEHOLD AND CORPORATE BALANCE SHEETS
- Households:
  - Households cut nominal debts by 20 percent from peak.
  - Debt ratio remains at 177 percent of disposable income.
  - Household net worth has risen 25 percent from its trough.
  - Recent survey: household debts concentrated among families with mortgages, having 2 to 3 children, reference person aged 35 to 44, and in the two top income quintiles.
  - Average interest rate on long-term “tracker” mortgages was 1.05 percent at end 2014.
  - Share of mortgages on primary dwellings in arrears for over 90 days declined to 14.8 percent in Q4 2014 from a peak of 17.3 percent five quarters earlier.
  - Staff estimates that some 4.4 percent of households have mortgages in arrears.
  - Prolonged arrears (over 720 days) rose to just over half of mortgages in arrears over 90 days; arrears outstanding on these mortgages account for 78 percent of total arrears over 90 days.
  - Buy-to-let mortgages in arrears remain at 29.4 percent of loans.
- Enterprises and SMEs:
  - In the year to Q3 2014, Irish private enterprises (excluding financial intermediaries) repaid outstanding credit at double-digit rates while building deposits at similar rates.
  - SMEs made fewer loan requests; SMEs see greater willingness of banks to lend and face lower loan rejection rates.
  - In H2 2014, lending rates for SMEs moved from the median in the euro area to the 75th percentile.
  - Some 25.4 percent of SME loans are in default, but 41.2 percent by value given high default rates on larger loans.

### KEY POLICY PRIORITIES AND RECOMMENDATIONS
- Overall priority: ensure that solid growth and job creation is sustained to further reduce unemployment and erode the high public debt burden.
- Fiscal policy:
  - Balance the budget over the cycle through a phased and steady adjustment.
  - An adjustment phased over three years would limit the drag on recovery.
  - Implement a policy mix to achieve steady fiscal adjustment that protects growth potential.
  - Both the expenditure and revenue sides can support adjustment and help create room to rebuild public investment.
  - Rigorous assessment of the quality of capital projects is needed to ensure investment helps avoid growth bottlenecks.
- Macro-financial and financial sector policies:
  - Facilitate a revival of financing flows in support of investment and recovery.
    - Tackling cases of prolonged loan arrears more vigorously.
    - Banks should address capital quality issues early to safeguard lending capacity.
    - Explore scope to further develop nonbank financing, especially risk capital for SMEs.
  - Strengthen the financial resilience of banks and borrowers to shocks while tempering Ireland’s property cycles.
    - Recent regulations of mortgage origination are welcome.
    - Supervision should ensure bank exposures to commercial property risks are appropriately contained.
    - Reforms to improve performance of the construction sector and the depth of rental property markets would help temper property cycles.

*March 9, 2015 — IMF mission to Ireland (visited Dublin during January 20–27; mission team led by Jörg Decressin and Alfred Kammer).*

### 9.      Bank health is benefiting from favorable funding conditions and property market

### 9.      Bank health is benefiting from favorable funding conditions and property market recovery yet challenges remain in loan resolution and the transition to Basel III

### Bank performance and drivers of improvement
- Domestic banks returned to profitability in the first half of 2014 for the first time since 2008; reports show continued improvements.
- Operating income growth reflected a fall in costs on both deposits and market funding.
- Provisioning expenses fell by two-thirds in 2014 H1 as impaired assets stabilized and increases in property prices contributed.
- These trends continued for the full year based on financial reporting by AIB and BoI.

### Non-performing loans and loan resolution
- NPLs remain very elevated at one-quarter of outstanding loans.
- By Q2 2014 NPLs had fallen 12 percent from their peak in Q3 2013, largely due to write-offs and disposals.
- Authorities caution that headline NPL figures overstate distress because loans expected to be serviced after a workout remain classified as NPLs until remaining debt is written off.

### Capital adequacy and Basel III transition
- CET1 ratios of domestic banks averaged a strong 13.4 percent in June 2014, partly reflecting lower risk-weighted assets due to loan repayments.
- Under CRD IV, Irish banks have balance sheet items (deferred tax assets and preference shares) that will be netted out from equity in capital calculations after transition periods, implying further action will be required for full transition to Basel III rules.

### Prospects, credit outlook, and funding conditions
- Growth projections: 3½ percent in 2015 and gradually easing to a 2½ percent pace in the medium term.
- Export growth is projected to revert to about 4 percent from 2015 (with trading partners growth at 2 percent per the latest WEO).
- Investment growth decelerates modestly yet remains brisk given the low base; private consumption is expected to revive gradually given still high household debt.
- Inflation rises only slowly as unemployment declines towards 8 percent by 2018.
- Despite strong 2014 growth, bank credit to the private sector declined by about 5 percent y/y; rising investment is expected to increase financing needs over time.
- Initial signs of pickup in credit are seen in mortgage approvals.
- Major Irish banks expect loan balances to stabilize and credit to grow broadly in line with GDP in the medium term, with financing by retained earnings and FDI reducing reliance on wholesale funding.

### Market access, sovereign financing, and external position
- Ireland’s market access is robust and on highly favorable terms.
- The NTMA secured over half of Ireland’s 2015 financing needs and made further early repayments to the IMF equivalent to €3.5 billion in February, bringing total early repayments to 54 percent of Fund lending.
- Staff’s preliminary estimates indicate the CBI to purchase in the secondary market the equivalent of over half of the bonds the NTMA is expected to issue through September 2016 under the ECB’s PSPP.
- Soon after the ECB announcement, the NTMA raised €4 billion from the sale of its first 30-year bond at a yield of 2.1 percent.
- EBA approaches suggest the current account and REER are broadly in line with fundamentals; a small undervaluation from the Current Account and External Sustainability approaches may reflect treatment of retained earnings of redomiciled firms.

### Risks to growth (key items from Box 2)
- Financial market volatility and sovereign risk reassessment (Relative Likelihood: H; Impact: M).
- Continued easy international financial conditions raising Irish commercial property prices and potential medium-term vulnerabilities (Relative Likelihood: M; Impact: M).
- Euro area stagnation impeding exports (40 percent of exports to euro area) (Relative Likelihood: H; Impact: M).
- Weak lending revival impeding domestic demand if Basel III constraints bind or slow NPL resolution limits redeployment of capital (Relative Likelihood: —; Impact: —).
- Excessively low inflation slowing decline in private and public debt burdens (Relative Likelihood: H; Impact: L).

### Public debt outlook and scenarios
- Public debt: 123 percent of GDP in 2013; fell to an estimated 111 percent of GDP in 2014.
- Baseline: gross debt falls below 100 percent of GDP in 2018.
- Scenario: if growth drops 2 percentage points below the baseline in 2015–16, debt would rise to 112 percent of GDP in 2017.
- Combined shock: cumulative worsening of the primary balance by 3.1 percent of GDP over 2015–20 and a 2 percentage point rise in interest rates on new debt would see debt peak at 113 percent of GDP in 2017.
- Disposal upside: state holdings in AIB and BoI were recently valued at about 8 percent of GDP by the NTMA and could significantly lower public debt if sold.

### Fiscal performance in 2014 and Budget 2015 guidance
- 2014 estimated deficit: 3.9 percent of GDP (about 4 percent of GDP in text).
- Budget 2015 targets an overall deficit of 2.7 percent of GDP (below the EDP ceiling of 3 percent).
- Staff projects a decline in the overall deficit of 1.2 percentage point of GDP in 2015, aided by:
  - strong growth: 0.4 percent of GDP,
  - interest bill reductions: 0.4 percent of GDP,
  - one-off revenues: 0.1 percent of GDP,
  - leaving 0.3 percent of GDP in primary structural adjustment.
- Staff estimate: structural primary adjustment from 2008 to 2015 totaled 13 percent of GDP.
- Fiscal stance recommendation: dedicate proceeds from disposals of stakes in the banks to debt reduction; avoid using revenue overperformance or lower interest bills to fund higher primary spending.
- Fiscal outturn table highlights (as presented):
  - Revenue: 55.3, 57.7, 2.3, 1.3
  - Tax revenue: 40.0, 41.3, 1.2, 0.7
  - Social contributions: 11.6, 11.8, 0.2, 0.1
  - Other: 3.7, 4.6, 0.9, 0.5
  - Expenditure: 64.9, 65.9, 1.0, 0.5
  - Current primary: 52.3, 53.2, 1.0, 0.5
  - Capital: 4.5, 5.2, 0.7, 0.4
  - Interest: 8.2, 7.5, -0.7, -0.4
  - Exchequer balance: -9.6, -8.2, 1.4, 0.7
  - General government balance, est.: -8.2, -7.2, 1.0, 0.5

### Policy recommendations (financial, property, and fiscal)
- Financial/property policy:
  - Implement a coherent set of financial and property-related policies to revive lending while protecting bank and borrower resilience and moderating property cycles.
  - Deploy prudential policy instruments to limit domestic banks’ exposure to potential asset price bubbles, including in commercial real estate, if such bubbles begin to emerge.
  - Address NPL resolution to enable redeployment of capital to profitable new loans.
- Fiscal policy:
  - Establish a medium-term fiscal goal of balancing the budget over the cycle to ensure growth erodes public debt over time and rebuilds fiscal space.
  - Phase and steady fiscal adjustment after 2015: primary adjustment totaling about 1.9 percent of GDP is needed to reach overall balance in structural terms; phase this over three years to limit average structural primary adjustment to some 0.6 percent of GDP annually, and pace no less than ½ percent of GDP per annum.
  - Use the SGP preventative arm (Expenditure Benchmark and Structural Adjustment rules) to support steady adjustment and prevent use of stronger-than-budgeted revenues for same-year supplementary spending.
  - Address Irish-specific technical issues in applying EU fiscal rules, including refining aspects of the EC methodology for cyclical unemployment swings and accounting for the large MNE sector; staff bases output gap estimates on GDP excluding sectors dominated by MNEs.

*Source: IMF staff report excerpt (section 9 and related passages).*

### 22.      Authorities’ views. The authorities recognized that a clear fiscal framework for the period

### Authorities’ views

### Fiscal framework and medium-term goal
- The authorities recognized that a clear fiscal framework for the period after Ireland’s forthcoming exit from the EDP is important.
- They agreed that balancing the budget in structural terms is a sound fiscal goal for Ireland in the medium term.
- The authorities are firmly committed to a structural adjustment of at least ½ percent of GDP annually from 2016 onwards.
- They are working closely with the EC to refine the potential GDP methodology for Ireland to support sound and reasonable implementation of the fiscal rules.

### Policies to underpin fiscal adjustment — overview
- Further fiscal adjustment is primarily driven by expenditure restraint as set out in the Comprehensive Expenditure Report 2015–17.
- Capital spending remains low in the medium term, at just under 1½ percent of GDP.
- Staff sees scope for both the expenditure and revenue sides to support adjustment:
  - Revenue measures would help create room to rebuild capital spending over time.
  - Revenue measures could be needed in response to evolving international tax standards such as the BEPS project.

### Expenditure-side reforms and pressures
- Demographic pressures on education, health, and pension spending total about ¼ percent of GDP per annum over the medium term.
- Public wage bill:
  - The expiry of the Haddington Road Agreement in 2016 will lead to pressures for some reversal of past savings.
  - Any developments on future public sector wage arrangements must recognize very tight fiscal constraints in coming years.
  - Further cost reductions and service delivery improvements through implementation of the Public Service Reform Plan 2014–16 should be sought.
- Social protection:
  - Expansion during the crisis needs to decline steadily as the economy recovers.
  - Scope to generate savings while protecting low incomes via means-testing of benefits and taxation of universal benefits.
  - Examples: distribution of medical cards to persons aged over 70 could be made conditional on income; the universal component of child benefits could be progressively reduced by treating it as a taxable income.
- Healthcare:
  - In 2012, Ireland’s health spending (on a real per capita PPP-adjusted basis) exceeded the OECD average by 12 percent while life expectancy is little above the OECD average.
  - Cost efficiency should be improved by reducing high use of costly acute care through expanded primary care and seeking further pharmaceutical savings.
- Education:
  - In 2011, Ireland had the third greatest annual expenditure per student in OECD countries by public educational institutions, some 14 percent above the OECD average on a PPP-adjusted basis.
  - Higher education funding reforms are needed to control growth in public spending while protecting low income students via better targeting of college fee subsidies.

### Capital spending and structural reforms
- The amount and quality of capital spending should be reviewed carefully to ensure adequate maintenance and avoid growth bottlenecks.
- A gradual rise in public investment may be required once the fiscal position is closer to balance, with rigorous project assessment to ensure quality.
- It would be appropriate to explore scope for well specified structural reforms with credible timelines and growth benefits to qualify for flexibility within the EU fiscal rules.

### Revenue-side reforms
- Ireland’s vulnerability was exacerbated by its formerly high reliance on a narrow tax base, especially real estate transactions; substantial progress has been made in broadening the tax base.
- Reforms to broaden the VAT base could significantly bolster revenues without raising the main VAT rate:
  - Closing one-quarter of the “policy gap” could generate 1 percent of GDP in additional revenue (see Table 10 of the October 2013 Fiscal Monitor).
- Maintaining up to date housing valuations will protect the property tax base and help lean against housing market cycles.
- The large drop in oil prices creates an opportunity to generate revenues by raising environmentally friendly taxes.
- The recent report on tax expenditures should guide a review over time of the remaining tax expenditures.

### Authorities’ views on fiscal composition
- The authorities noted a role for further broadening of the tax base, while also considering it important to address high marginal income tax rates.
- They agreed on the need to protect gains from previous revenue and spending measures and to implement a policy mix supportive of growth and employment.
- On spending, they noted demographic pressures had been accounted for in expenditure projections and recognized the need for ongoing reforms and discipline across spending areas.
- A review of capital expenditure was in progress.
- The authorities are actively engaged in the BEPS project and are closely monitoring the evolution of international tax standards to ensure compliance with best international practice.

### Macro-financial policies — risks and objectives
- Policies to revive financing need to be complemented by measures to promote the resilience of banks and borrowers.
- Revival of financing is needed to support investment in the medium term, including construction of commercial and residential properties.
- Property markets are rising strongly, with foreign investment playing a role, and easy international financial conditions will likely persist.
- While ensuring sufficient financing from banks and nonbanks, it is critical to protect resilience to potential significant fluctuations in property prices and to moderate property price cycles.

### Facilitating a revival of financing flows — NPLs and resolution
- By September 2014:
  - Resolution was yet to conclude in about half of mortgage arrears cases.
  - A further one-tenth of cases were under repossession proceedings to be completed.
- Mortgage restructuring under the CBI’s MART framework in 2013–14 saw substantial activity, but slow resolution is reflected in rising prolonged arrears and very high buy-to-let arrears.
- SMEs:
  - Most SMEs with distressed loans have a workout plan that will trigger a debt restructure when specified steps are completed; this process could take some years and constrain investment and job creation.
- Benefits of NPL resolution:
  - For borrowers, resolution would address debt overhangs that constrain activity and mobility.
  - For banks, resolution would allow a shift from NPL management to loan origination as demand for credit grows.
- Recommendations to reinvigorate NPL resolution:
  - Maintain momentum under the MART framework with banking supervision continuing to monitor and guide mortgage resolution efforts.
  - Maintain high transparency on the scale and quality of resolution.
  - Hasten durable resolution in prolonged arrears, including timely repossession proceedings where feasible to secure borrower engagement on lasting restructures.
  - Raise utilization of the personal insolvency system, including bankruptcy proceedings.
  - For SME workouts, supervision should ensure banks are proactive in advancing completion as property disposal market conditions improve.

### Bank capital quality and nonbank financing
- Supervision should encourage early actions to address bank capital quality issues:
  - Deferred tax assets and preference shares are set to be phased out as eligible regulatory capital under the new EU rules.
  - Early restructuring of capital bases and building high quality loss absorbing capital before new rules become binding is preferable to relying primarily on internal capital generation.
- Further development of nonbank financing, especially for SMEs, can complement bank lending and contain macro-financial risks:
  - REITs, authorized since 2013, have leverage limited to 50 percent of the market value of their assets and are bringing fresh equity into real estate markets.
  - Scope should be explored for closed-end mutual funds, private equity, SME securitizations and covered bonds to provide risk capital to SMEs.
- State-sponsored financing vehicles:
  - ISIF legislation enacted in July 2014; it has some 4 percent of GDP in resources and can support economic activity and employment through commercial investments.
  - Two ISIF SME Funds have demonstrated solid deal flow; the third will not be renewed as improving conditions limited SME turnaround opportunities.
  - SBCI could enhance credit availability for SMEs and help ease lending rates, but monitoring of loan portfolio risks is needed given state funding guarantees.
- Authorities’ views on financing:
  - They noted substantial legislative, administrative, and supervisory efforts to facilitate resolution of distressed loans and that progress is greater than headline NPL ratios suggest.
  - The resolution process would need to continue for a number of years while employment and property markets recover.
  - Authorities are confident banks’ medium term capital management plans will fully meet new regulatory requirements.
  - They favor developing alternatives to bank lending and will continue to carefully manage ISIF and SBCI risks.

### Promoting resilience and tempering cycles — macroprudential framework
- The CBI published A Macro-Prudential Policy Framework for Ireland outlining instruments and decision making for applying macroprudential tools.
- The framework should be applied proactively as macro-financial risks evolve.
- There are significant uncertainties around timing and impact of macro-prudential adjustments; ex ante steps are important to maintain financial resilience.

### Mortgage regulation and borrower resilience (Box 3 summary)
- Recent CBI regulation announced:
  - No more than 15 percent of mortgage lending to owner-occupiers will be at an LTV ratio of greater than 80 percent.
  - No more than 20 percent of mortgage lending will be at an LTI ratio of greater than 3.5 times.
  - For first-time buyers (FTBs): LTV limit is 90 percent up to a property value of €220,000 and 80 percent on amounts above that.
- Rationale and calibration:
  - Differential treatment for FTBs reflects lower default experience; FTBs accounted for almost half of new mortgages in 2014.
  - CBI research finds FTBs are nearly 4 percentage points less likely to default than second and subsequent buyers (SSBs), with an average difference of 30 percent in default risk controlling for borrower and loan characteristics.
  - For the average FTB, an increase in LTV from 80 percent to 90 percent is estimated to increase the probability of default by just over 1 percentage point.
- Binding risk and near-term impact:
  - In 2013, LTVs exceeded 80 percent on 40 percent of primary dwelling mortgages—over the 15 percent that may exceed an 80 percent LTV.
  - LTIs exceeded 3.5 on 20 percent of mortgage loans.
- Implementation notes:
  - Caps are “proportionate” with a small share of gross lending allowed to breach the caps.
  - The differential FTB treatment should be periodically reviewed based on default experience.
  - The credit register will eventually provide valuable information on borrowers’ credit records and total debt to help limit circumvention.

### Commercial real estate, housing construction, and rental market
- Commercial real estate:
  - Losses on commercial property accounted for over half of bank capital needs in the crisis.
  - Upwards pressure on commercial property prices may continue given low yields and ECB quantitative easing, raising prospect of a renewed price slump.
  - Supervision should focus on banks’ risk management, underwriting standards, and valuations in the sector.
  - Deployment of macro-prudential tools to contain banks’ commercial property exposures (loan-to-value limits, capital add-ons) should be biased to being ahead of the curve.
- Housing construction:
  - House price rises are beginning to promote construction but supply response is weaker than past experience.
  - High construction costs, including local building codes stricter than national standards and development levies, are key factors.
  - Developers reluctant to use external equity given more prudent LTV limits to construction loans.
  - Recommendations: strengthen incentives to complete developments via use-it-or-lose-it building permits and a vacant site levy; timely implementation of Construction 2020 actions, including streamlining and modernizing planning procedures.
- Rental market:
  - A more developed rental market would support labor mobility, help moderate property cycles, and reduce household exposure to house price fluctuations.
  - Rented properties are a low share of Irish housing.
  - Large role of small scale buy-to-let investors militates against security of tenure for renters and undermines liquidity of investors’ property.
  - Recommendation: review framework for rental property to attract professional investment and management to expand supply and quality of rental property and moderate rents.

*Source: IMF staff report excerpts in content unit _cr1577 - 22. Authorities’ views.*

### 41.      Authorities’ views.  The authorities agreed on the need to promote the financial resilience of

### 41.      Authorities’ views.

### Authorities' assessment of financial resilience and supervision
- Need to promote the financial resilience of borrowers and banks through the cycle.
- New mortgage regulations could be adjusted to moderate risks if the need arose.
- Commercial real estate market developments are being monitored, but authorities did not consider a similar rules-based regulation appropriate given the scale and idiosyncratic nature of these transactions.
- Supervisory approach for commercial real estate: utilize onsite and offsite examination of credit underwriting and supervisory powers such as the application of individual capital add-ons.

### Housing supply actions by authorities
- Authorities emphasized they were proactive on housing supply.
- Construction 2020 strategy addresses key issues related to planning, sustainable development financing, and transparent and sustainable mortgage lending.
- Planned and ongoing measures:
  - Legislation on planning will be submitted to parliament before the summer recess.
  - A conference to bring equity providers and developers together has been organized.
  - A public consultation has been launched on taxation measures to encourage development of zoned and serviced land.
  - Expanded investment in Budget 2015 and the recently launched Social Housing Strategy aim to address the undersupply of affordable and good quality social housing.

### STAFF APPRAISAL

### Growth outlook and macro risks
- Ireland’s recovery is off to a good start and the priority is to maintain solid growth and job creation.
- Export and investment driven growth is beginning to be supported by consumption.
- Ireland has the potential for a self-sustaining recovery to reduce high unemployment, which will entail rising investment with growing needs for financing.
- Risks to growth widen in the medium term, including from the potential for protracted slow growth in the euro area.
- Policy prescription: A combination of prudent fiscal and financial policies is needed to support growth while building policy space and private sector resilience to help manage shocks.

### Fiscal policy guidance
- Ireland should seek to balance its budget over the cycle through a phased and steady adjustment.
- Rationale: Ensuring that growth erodes Ireland’s high public debt burden over time; fiscal balance will underpin confidence to invest and create jobs, even in less favorable economic and financial conditions.
- Declining debt will rebuild fiscal space to cushion future shocks to growth.
- Specific pace: Closing the structural deficit over a three year period, at a pace of no less than ½ percent of GDP annually, would limit the drag on growth in the near-term and support economic stability.
- EU fiscal rules will support such a path toward fiscal balance but Irish-specific technical issues in applying these rules should be addressed.

### Composition of adjustment and public spending
- Policy mix should protect Ireland’s growth potential and not exclude revenue measures.
- Public investment has been reduced to low levels; the amount and quality of spending should be reviewed carefully to ensure adequate maintenance and avoid growth bottlenecks.
- Both expenditure and revenue sides can support adjustment and help create room to rebuild capital spending over time.
- Revenue measures could be needed if evolving international tax standards impact the tax base in the medium term.
- Reforms needed to deliver core public services within a manageable spending envelop in the face of demographic pressures:
  - Continued wage restraint after current agreements expire.
  - Better targeting social protection spending.
  - Improving the cost efficiency of healthcare provision.
  - Reforming higher education funding while protecting low income students.

### Financial sector, nonperforming loans, and alternative finance
- A range of policy efforts are needed to facilitate a lasting revival of financing flows in support of investment and recovery.
- Progress has been made resolving nonperforming loans in recent years, but cases of prolonged arrears are rising and buy-to-let arrears remain very high.
- Reinvigorated efforts are needed to hasten resolution of the most entrenched cases to address private debt overhangs and enhance medium-term prospects for bank lending.
- Supervision should encourage banks to take early actions to address capital quality issues to safeguard lending capacity.
- Scope to further develop nonbank financing should be explored, especially risk capital for SMEs, to complement bank lending and moderate macro-financial risks.
- Fiscal risks from state financing vehicles should be contained.

### Macro-prudential policy and mortgage regulation
- It is timely to strengthen the financial resilience of banks and borrowers to ensure recovery is more robust to future shocks including property cycles.
- Macro-prudential policy tools should be applied proactively as risks evolve, yet given uncertainties around the impact of these tools, policies must also ensure financial resilience through the cycle.
- The CBI’s recent steps to strengthen the regulation of residential mortgage lending are welcome.
- The differential treatment of first-time borrowers should be kept under review based on default experience.
- With commercial property prices rising fast, in part due to international inflows in search of yield, supervision should ensure bank exposures to these risks are appropriately contained, with the deployment of macro-prudential tools biased to being ahead of the curve.

### Construction and rental market reforms
- Construction and rental market reforms could dampen increases in prices and rents, and in time temper Ireland’s property cycles and associated macroeconomic instability.
- Recommendations to strengthen construction supply response:
  - Reduce construction costs.
  - Enhance incentives to complete developments.
  - Streamline planning procedures and implement other Construction 2020 actions to improve sector performance.
- Rental framework reform goals:
  - Attract investment and professional management to expand the supply and quality of rental property.
  - Over time moderate rents, benefitting those on low incomes in particular.
  - Facilitate labor mobility in support of sustained growth and low unemployment.

*IMF staff appraisal and authorities’ views as presented in the source content.*

### 48.      It is recommended to hold the next Article IV consultation with Ireland on the

### It is recommended to hold the next Article IV consultation with Ireland on the standard 12-month cycle.

### Real sector and inflation indicators (2006–15)
- All GDP components contributed to a 4.9 percent y/y expansion in Q1-Q3 2014.
- Q1–Q3 2014: GDP growth contributions shown by Net exports, Inventories, Investment, Consumption (chart reference).
- Consumer sentiment: index base 1995Q4=100; series shown Jan-11 to Jan-15 with rising retail trade volume ex auto (2005=100).
- Manufacturing indicators: Manufacturing PMI (50+=expansion) and new export orders (50+=expansion) are positive; industrial production data has been volatile.
- Current account: remained broadly balanced in Q1-Q3 excluding estimated profits of redomiciled firms.
- Inflation:
  - HICP contribution: Core inflation edged up to 1.1 percent as services prices rose.
  - Energy-driven HICP turned negative owing to falling energy prices.
- Labor market:
  - Unemployment declined to 10.4 percent in Q4 (series shows unemployment rates and components: less than one year, long-term, youth unemployment).
  - Long-term and youth unemployment declined but remain high.

### Household finance and housing developments (2003–15)
- Household savings: three-quarters of savings devoted to debt reduction since 2010 (saving rate decomposition shown; percent of gross disposable income).
- Debt and interest burdens:
  - Debt burden and interest burden series plotted as percent of gross disposable income.
  - Effective interest rate series shown.
- Mortgages in arrears on primary dwellings:
  - Share of mortgages in arrears continues to decline except for arrears over 720 days.
  - Arrears series by band (Arrears over 720 days; Arrears 181 to 720 days; Arrears over 180 days; Arrears 91 to 180 days).
- Residential property market:
  - Revival particularly in Dublin; prices still well below peak levels.
  - Rising house prices together with household debt reductions lifted net worth by 25% from trough.
- New mortgage lending:
  - Rebounded strongly during the second half of 2014, albeit from low levels.
  - Housing loans and mortgage approvals series (Billions of euros) shown for 2011Q1–2014Q3.
- Household assets and liabilities:
  - Household assets, liabilities and net worth series plotted as Percent of GDP.

### Credit developments (2003–15)
- Deposits:
  - Enterprise deposits are rising while household deposits remained stable (Deposits from Irish Private Residents, Billions of EUR).
- Credit contraction:
  - Credit continues to contract, especially as non-financial corporations repay loans.
  - Loans outstanding to Irish residents: households and non-financial corporations percent change y/y (2009–2014).
- SME sector:
  - Deleveraging evident: redemptions continue to exceed new credit in SME sector.
  - Outstanding SME credit (Billions of euros) and sectoral composition (2010Q1=100).
- Interest rates and margins:
  - Median lending and deposit rates, new business (percent): NFC lending rate (loans up to €1 mln); NFC deposit rate; House purchases lending rate; Households deposit rate (series 2003–2015).
  - Interest rate margins between loans and deposits (Percent) series for total outstanding loans and deposits and new loans and deposits.
  - Low deposit rates together with a drift up in lending rates continue to boost banks’ interest margins, helping profitability.

### Competitiveness indicators (1996–2015)
- Harmonized competitiveness indicators moved broadly in line with the euro exchange rate (Nominal HCI; Real HCI, CPI-based; Real HCI, PPI-based; 1999Q1=100).
- Sectoral shift:
  - Part of earlier improvement reflected a shift to higher value-added sectors.
- Wages and productivity:
  - Private wages have increased at a slower pace than in the euro area, but appear to be picking up recently.
  - Hourly labor costs in manufacturing (2006=100; 4-quarter moving average): Ireland vs Euro area (series shows convergence).
  - Real labor productivity (Index, 2005=100, s.a.): Ireland vs Euro area — gap widened in 2010–11 but is no longer widening.
- Exports and market share:
  - Strong rise in services market share is starting to lift Ireland’s overall export market share.
  - Exports of goods and services and component shares plotted as Percent of world non-oil imports (1999–2013).

### Selected trends in general government finances (2007–18)
- Primary balance:
  - The primary deficit is estimated to have closed in 2014, down from 10¼ percent of GDP in 2010.
  - Primary balance and overall balance series shown (Percent of potential GDP; Percent of GDP).
- Fiscal adjustment:
  - Structural fiscal adjustment was strong in 2009–14, reflecting real spending cuts and revenue growth exceeding domestic demand.
  - More gradual adjustment in coming years relies mostly on real spending declines.
  - Structural primary balance change and composition of adjustment (Revenue net of Domestic Demand, Real Primary Spending).
- Projections (2015–2018):
  - Movement into primary surplus is projected to be driven by further declines in spending to GDP.
  - Revenues projected to decline 2 percentage points as a share of GDP from 2014 to 2018, given slower rebound in domestic demand than GDP.
  - Primary expenditures projected to fall by 5 percentage points of GDP form 2014 to 2018.
- Debt dynamics:
  - Half of the increase in net debt arose from bank support costs.
  - The fall in net debt in 2014 reflects IBRC liquidation (note in tables: equivalent to 6 percent of GDP).

### Key macroeconomic projections and indicators (Tables 1–3, selected figures)
- Real GDP (annual percent change):
  - 2010: -0.3; 2011: 2.8; 2012: -0.3; 2013: 0.2; 2014: 4.8; 2015: 3.5; 2016: 3.0; 2017: 2.7; 2018: 2.5; 2019: 2.5; 2020: 2.5.
- Final domestic demand and components (selected years):
  - Final domestic demand 2014: 3.8; 2015: 2.7; 2016: 2.6.
  - Private consumption 2014: 0.8; 2015: 1.5; 2016: 1.6.
  - Gross fixed investment 2014: 10.0; 2015: 9.5; 2016: 7.5.
- Real GNP and saving:
  - Real GNP 2014: 3.4; 2015: 3.3; 2016: 2.7.
  - Gross national saving (percent of GDP) 2014: 19.4; 2015: 19.8; 2016: 20.8.
- Prices and labor market:
  - Harmonized index of consumer prices: 2014: 0.3; 2015: 0.2; 2016: 1.5.
  - Average wage, whole economy 2014: -0.1; 2015: 2.5; 2016: 1.2.
  - Employment 2014: 1.7; 2015: 1.9; 2016: 1.9.
  - Unemployment rate: 2013: 13.0; 2014: 11.3; 2015: 10.0; 2016: 9.1.
- Public finance (percent of GDP, selected):
  - Net lending/borrowing (excl. one-off items): 2014: -4.1; 2015: -2.8; 2016: -1.5.
  - Primary balance (excl. bank support): 2014: 0.2; 2015: 1.0; 2016: 2.0.
  - General government gross debt (2014): 110.5; 2015: 109.0; 2016: 107.0.
  - General government net debt (2014): 86.5; 2015: 86.4; 2016: 85.3.
- Medium-term scenario (Table 2 projections):
  - Current account (percent of GDP): 2015: 2.8; 2016: 3.4; 2017: 3.1; 2018: 3.1; 2019: 3.4; 2020: 3.5.
  - Gross national saving (percent of GDP) 2015: 19.8; 2016: 20.8; 2017: 21.0.
  - Gross investment (percent of GDP) 2015: 17.0; 2016: 17.4; 2017: 17.9.
- General government statement of operations (Table 3, percent of GDP, selected):
  - Revenue 2014: 64.2; 2015: 65.3; 2016: 67.4; 2017: 68.5; 2018: 70.1; 2019: 72.4; 2020: 72.9.
  - Taxes 2014: 46.2; 2015: 46.9; 2016: 49.0; 2017: 49.8; 2018: 51.2; 2019: 52.4; 2020: 54.0.
  - Net lending/borrowing (excl. one-off items) 2014: -7.6; 2015: -5.4; 2016: -2.9; 2017: -1.7; 2018: 0.0; 2019: 0.0; 2020: 0.1.
  - Primary balance (excl. one-off items) 2014: -0.1; 2015: 1.6; 2016: 3.9; 2017: 5.4; 2018: 7.1.
- Public finance memorandum:
  - Structural primary balance (percent of nominal potential GDP) 2014: 1.1; 2015: 1.4; 2016: 2.1; 2017: 2.7; 2018: 3.3.

### External and financial vulnerability indicators (Tables 4–6, selected)
- Balance of payments and external sector:
  - Current account balance (in percent of GDP): 2014: 3.4.
  - Balance of goods and services (percent of GDP): 2014: 43.1.
  - Income balance (percent of GDP): 2014: -34.8.
  - Capital and financial account balance (percent of GDP): 2014: 5.6.
  - Inward portfolio investment 2014: 31.2 (in billions; table lists inward portfolio investment values).
  - Inward foreign direct investment 2014: 15.5 (in billions).
- Financial markets indicators:
  - Government bond yield (10-year, end-period): 2014: 1.2.
  - Spread with Germany (end of period): 2014: 0.6.
  - Real government bond yield (10-year, period average, based on HICP): 2014: 2.0.
  - Non-performing loans (in percent of total loans) 2014: 12.5.
  - Total provisions for loan losses (in percent of total loans) 2014: 5.0.
  - Regulatory capital to risk-weighted assets of domestic banks (in percent) 2014: 15.1.
  - Bank return on assets (before tax, in percent) 2013: -0.7; earlier years shown: -3.1 (2010), -0.8 (2011), -0.8 (2012).
- Monetary and banking sector (Table 6, selected):
  - Aggregate balance sheet of domestic market credit institutions: Assets Dec-10: 747; Dec-11: 639; Dec-12: 550; Dec-13: 474; Mar-14: 459; Jun-14: 439; Sep-14: 423; Nov-14: 420 (billions of euros).
  - Claims on Irish resident non MFIs: Dec-10: 359; Dec-13: 281; Nov-14: 241.
  - Deposits of Irish resident non MFIs (private sector): Dec-10: 162; Dec-13: 161; Nov-14: 163.
  - Irish resident broad money (M3): Dec-10: 182; Dec-13: 201; Nov-14: 191.
  - Wholesale funding (billions of euros) Dec-10: 317; Nov-14: 126.
  - Credit to deposits (in percent) Dec-10: 199.2; Dec-13: 161.4; Nov-14: 144.6.

### Balance of payments detail (Table 5, selected entries)
- Current account balance (in billions of euros): 2014: 6.2; 2015: 5.4; 2016: 6.7 (table provides yearly series 2010–20 in both billions and percent of GDP).
- Credit and debit flows (selected):
  - Exports of goods 2014 credit: 97.8 (series in table shows credits and debits across categories).
  - Income balance credit and debit series indicate large cross-border income positions with Income balance (percent of GDP) 2014: -34.8 (as above).
- Current account balance excluding undistributed profits of redomiciled firms: series provided (table includes projection values).

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

### Annex I. External Balance and Competitiveness Assessment

### Annex I. External Balance and Competitiveness Assessment

### A. External Balance broadly in Equilibrium
- Overall assessment:
  - "A range of External Balance Assessment methodologies suggest that the external position is broadly in line with fundamentals and desirable policy settings."
  - Setting aside the pharmaceutical "patent cliff", Ireland’s competitiveness has held up well; services booming, non-pharmaceutical goods exports reclaiming market share since 2012, solid FDI inflows.
- Current Account and Exchange Rates:
  - "The real exchange rate has fallen notably since the crisis—especially when measured on a unit labor cost (ULC) basis—and has remained fairly stable over the last two years."
  - Both the Current Account (CA) and the Real Effective Exchange Rate (REER) approaches report a positive current account gap, suggesting a slight undervaluation of the currency.
  - The equilibrium exchange rate approach suggests a small overvaluation on average for 2014, largely unwound by Euro depreciation: "the REER was 5½ percent lower in January 2015 compared to the 2014 average."
  - "In both cases, policy gaps make a negligible contribution to the overall CA and REER gaps."
- External Balance Assessment quantitative summary (estimates based on data available in October 2014):
  - EBA Current Account (CA) approach: CA gap = 5.7-6.5 (Percent of GDP)
  - External sustainability (ES) approach: CA gap = 4.6-5.2 (Percent of GDP)
  - EBA REER approach: REER gap = -6 (percent)
  - Note: "A positive CA gap indicates undervaluation, a positive REER gap indicated overvaluation."
- Role of redomiciled firms:
  - Redomiciled firms likely explain bulk of estimated positive current account gap.
  - FitzGerald (2013) estimate: "retained earnings contributed 5.3 percent of GDP to the current account balance in 2012."
  - Updated CSO data: contribution was "3.9 percent of GDP for 2013 and at least as much in 2014", representing "two-thirds of the estimated current account gap."

### Capital Account Flows and International Investment Position
- IFSC dominance:
  - "Ireland’s capital account is dominated by the International Financial Services Center (IFSC). It accounts for 85 percent of overall portfolio and other investment flows and its total transactions are 33 times larger than Ireland’s GDP."
  - IFSC inflows and outflows are closely matched; IFSC’s IIP very close to balance; overall NIIP dominated by non-IFSC sector.
  - Ireland is a large FDI recipient, yet "its net direct investment position is in fact positive" due in part to large positive valuation effects associated with redomiciled firms’ foreign assets.
- Non-IFSC IIP developments:
  - Non-IFSC IIP improved rapidly: from "-115 percent of GDP in 2011" to "-77 percent of GDP in 2014 Q3."
  - Primary contributors: banks’ diminished reliance on Eurosystem funding (reduced CBI Target 2 liabilities) and stabilization/gradual projected decline in general government external liabilities.
  - With a small current account surplus projected going forward, "Ireland’s NIIP-to-GDP ratio is expected to continue its gradual improvement."
- Net IIP by financial instrument, 2014 Q3 (percent of GDP): figures presented in original source distinguishing IFSC and Non-IFSC across FDI, Portfolio, Other instruments.

### B. Competitiveness—Services up, Pharmaceuticals down
- Export composition trends:
  - "Ireland’s strong export performance has been driven primarily by the services sector."
  - Exports of goods rose relative to GDP in 2010-11, then receded; exports of services steadily increased and "surpassed goods exports in 2013."
  - Ireland’s share in world services exports has rapidly increased; goods exports share fell from "1.4 percent of world exports in 2002 to under 0.7 percent by 2012–14."
- Contract manufacturing and measurement challenges:
  - Discrepancy in 2014 export measures: "goods exports as recorded at the customs increased 1.5 percent y/y in euro terms in the first ten months of 2014, even as national accounts report real goods export growth of 15 percent y/y for the first nine months of the year."
  - Partly explained by "contracted manufacturing" (exports of goods manufactured abroad by companies headquartered in Ireland) counted in GDP but not customs exports.
  - Pharmaceutical sector specifics: national accounts show industry output increased "some 40 percent y/y in the first seven months of 2014", while pharmaceutical exports at customs "dropped 3.6 percent over the same period."
  - Note on comparability: pharmaceutical exports for 2014 are measured by adding HS lines 29 (Organic Chemicals) and 30 (Pharmaceutical products); this is narrower than the Ministry of Finance study using SITC codes 51 and 54.
- Market share and patent cliff:
  - Ireland "has been steadily losing ground on world markets" and also lost share within the EU.
  - Much of the decrease attributed to the pharmaceutical patent cliff; exports excluding pharmaceuticals show a tepid recovery of market share since 2012.
  - "There are early signs that the impact of the pharmaceutical patent cliff is gradually dissipating."

### C. International Tourism Competitiveness
- Rationale for tourism as competitiveness gauge:
  - IT and business services account for nearly two-thirds of services exports but have relatively little domestic value-added; tourism provides an export-oriented services sector with higher domestic value added for cross-country comparisons.
  - Tourism accounts for "2 percent" of GDP and "4 percent" of services exports.
- Market share and arrivals:
  - "Ireland lost global market share in the aftermath of the crisis."
  - Evidence suggests part of the loss due to temporary migrant workers and visiting relatives leaving after the crisis; e.g., arrivals from Poland dropped "28 percent" between 2007 and 2009 versus an average drop of "13 percent" for other OECD countries.
  - Since 2009, Ireland’s share in arrivals "has declined only marginally", while tourism receipts have "flattened (world) or even improved (compared to other EU destinations)."
- Gravity model and revealed attractiveness:
  - Culiuc (2014) applies a gravity model to bilateral tourism arrivals 1999–2009; country fixed effects coefficients can serve as an index of tourism attractiveness after controlling for gravity variables.
  - Result: over 1999–2009, "Ireland was – over the 1999-2009 period – marginally above average on this particular indicator of tourism competitiveness."
- Market over-performance vs. model predictions:
  - Ireland has been "gradually losing its stronghold in traditional Anglophone markets – primarily the UK and the US, but also Canada, Australia and New Zealand."
  - Labor migration likely explains the large over-performance for Poland.

### Annex II. Debt Sustainability Analysis — Public Debt Sustainability Analysis (selected findings)
- Statistical revisions and one-off events (impact on historical debt data in 2014):
  - Consolidation of Irish Bank Resolution Corporation (IBRC) into general government with the shift to ESA 2010 added "€12.6 billion" to end-2013 public debt, a "6.2 percent" increase.
  - Transition to ESA 2010 also resulted in an upward revision to GDP of "6.5 percent" in 2013.
  - Revised debt-to-GDP ratio at end-2013: "123.3 percent" (very close to "123.7 percent" reported to the 1st PPM Report).
  - Gross public debt estimated to have dropped "12 percentage points, to 111 percent of GDP at end-2014" due to two main factors:
    - IBRC liquidation completed in 2014 reduced end-2014 debt by "6 percentage points of GDP"; remaining liabilities down to "€1.5 billion" (expected to be dealt with gradually).
    - Draw-down of cash deposits and short-term investments from "€18.5 to €11 billion" contributed "a 4 percentage point" drop in gross debt-to-GDP.
- Baseline outlook improvements since prior DSA:
  - Gross public debt "is 4 percentage points lower in 2014 after accounting for statistical revisions" and projected to remain below the medium-term debt path from the 1st PPM report because of:
    - Better growth prospects: "Growth revisions for 2014-15 alone reduce the end-2015 debt ratio by 3.3 percentage points of GDP."
    - Early repayments of Fund credit began mid-December 2014; these lower interest bill by a cumulative total of "1 percent of GDP" over a number of years and are expected to extend debt maturity profile. Projected GFN for 2015 are raised by financing these repayments, but GFN forecast to remain below "15 percent of GDP" over the medium term.
    - Improved financing conditions: yield on 10 year Irish bonds "is around 1.2 percent"; baseline projections conservatively keep spreads on Irish bonds at "125 bps for 2015 (currently below 90 bps), gradually increasing to 200 bps by 2018."
- Risks and vulnerability indicators:
  - Heat map and fan charts indicate Ireland faces high risks to debt sustainability:
    - "The debt burden benchmark for advanced economies of 85 percent of GDP is exceeded," indicating high vulnerability under all scenarios.
    - GFN exceeds "15 percent of GDP" under the contingent liability shock but remains below the vulnerability threshold of "20 percent of GDP."
    - Risks from external financing requirements (excluding IFSC) and public debt held by non-residents exceed upper risk assessment benchmarks.
  - Asymmetric fan chart (only negative shocks to the primary balance) shows risks "skewed to the upside."
- Forecast accuracy and fiscal adjustment:
  - No evidence of systematic projection bias: median forecast errors for real GDP growth and the primary balance during 2005–13 are "below 1 percent" and in line with other countries; large individual errors concentrated in crisis period.
  - Projected fiscal adjustment: change in cyclically-adjusted primary balance is "in the top quartile of fiscal adjustments observed in advanced and emerging market countries with debt greater than 60 percent of GDP."
  - Under the baseline macro projection, debt ratio will continue declining:
    - Automatic debt dynamics in 2014 reduced debt by "1.9 percentage points of GDP."
    - Projected interest rate-growth differential "will remain close to zero in the medium term."
    - GFN are forecast to follow a U-shape and peak at "13 percent of GDP in 2020" before dropping in subsequent years.

*Source: Annex I. External Balance and Competitiveness Assessment; Annex II. Debt Sustainability Analysis (excerpts).*

### 7. The projected decline in public debt remains vulnerable to lower growth (Figure 5).

### 7. The projected decline in public debt remains vulnerable to lower growth (Figure 5)

### Summary of main risk findings
- Growth shock:
  - A reduction in projected real GDP growth rates for 2015–16 by 0.5 standard deviations (implying annual growth about 2 percentage points lower at 1 percent in 2016 and 0.7 percent in 2017) causes the debt-to-GDP ratio to peak at 112 percent in 2017 (compared with 104 percent under the baseline) before declining.
- Interest rate shock:
  - Ireland’s medium-term profile is relatively sheltered by a high share of fixed rate and official borrowing and by relatively low near-term financing needs.
  - A 200 basis point interest rate increase on new borrowing affects the debt trajectory only marginally.
- Combined macro-fiscal shock:
  - Slower growth in 2016–17 compounded by a primary balance shock and a 2 percentage point rise in interest rates on new borrowing raises the debt ratio to 113 percent of GDP in 2017 and then to 103 percent by 2020.
  - In this scenario, gross financing needs increase by 2.1 percentage points of GDP on average over the medium term, reaching 15 percent in 2020.
- Contingent liability shock:
  - Remaining financial sector contingent liabilities identified include: (i) risks that bank provisions are inadequate to cover losses on large NPLs, (ii) potential shortfalls in crystallized value of NAMA assets, and (iii) costs related to restructuring the credit union sector (net loans only 2½ percent of GDP).
  - A scenario assumes a contingent liability shock equal to 10 percent of GDP (used instead of a default shock of 10 percent of banking sector assets, equivalent to around 30 percent of GDP, after accounting for prior public support of 40 percent of GDP).
  - Such a contingent liability shock, if combined with the above growth shock, would push gross public debt to around 117 percent of GDP in 2016-17 before declining to 106 percent by 2020.

### Upside risks and asset-sale considerations
- Baseline projections do not incorporate proceeds from further state asset disposals of stakes in banks or other transactions reducing past banking support costs beyond the sales of interests in BoI and Irish Life in 2013.
- Example valuation: NTMA valued state holdings in AIB at €13.3 billion (about 7 percent of GDP) at end 2014.

### External debt and sectoral composition (high-level findings)
- Non-IFSC external debt:
  - Continued decline but remains very high: at end of Q3 2014 it was around 254 percent of GDP, down from 320 percent of GDP in 2010.
  - The decline largely reflected a fall in Target 2 liabilities as banks reduced Eurosystem funding reliance.
- Including the IFSC:
  - Total external debt remains very high at 910 percent of GDP, though IFSC debt has declined 23 percentage points of GDP since early 2012.
- Public-sector external debt:
  - External debt of the general government flattened in nominal terms since late 2013/early 2014; external debt is expected to continue falling but remains subject to the same shock-induced risks that imply more gradual reductions in public debt.

### Key quantitative stress-test outcomes (selected)
- Baseline vs shocks (selected peak debt outcomes):
  - Baseline debt-to-GDP peak under baseline path: 104 percent (reference point for comparison with shocks).
  - Growth-shock peak: 112 percent in 2017.
  - Combined macro-fiscal shock peak: 113 percent in 2017; 103 percent by 2020.
  - Contingent liability + growth shock peak: around 117 percent in 2016-17; 106 percent by 2020.
- Financing needs under shock:
  - Gross financing needs rise to 15 percent of GDP in 2020 under the combined macro-fiscal shock.
- Contingent liability scenario calibration:
  - A 10 percent of GDP shock is used to capture remaining contingent liability risk.

*Source: IMF staff analysis in "7. The projected decline in public debt remains vulnerable to lower growth (Figure 5)."*

### Annex II. Figure 6. Ireland: External Debt Sustainability: Bound Tests  1/ 2/

### Annex II. Figure 6. Ireland: External Debt Sustainability: Bound Tests  1/ 2/

### External debt bound test scenarios and notes
- External debt expressed as "External debt in percent of GDP".
- Sources: International Monetary Fund, Country desk data, and staff estimates.
- Notes on shocks and calculations:
  - 1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.
  - 2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.
  - 3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - 4/ One-time real depreciation of 30 percent occurs in 2016.

### Scenario outcomes shown in the figure (external debt in percent of GDP)
- Historical: 184
- Baseline: 164
- CA shock: 175; Baseline: 164
- Combined shock: 184; Baseline: 164
- Combined shock + 30% depreciation (Real depreciation shock 4/): 236; Baseline: 164
- Growth shock: 183; Baseline: 164

### Boxed average projections (baseline / scenario / historical ten-year average)
- Baseline: 2.9; Scenario: 3.9; Historical: 6.7
- Baseline: 2.6; Scenario: 0.6; Historical: 1.4
- Baseline: 9.7; Scenario: 7.4; Historical: 16.5

### Figure axes and labels referenced
- Gross financing need under baseline (right scale)
- Non-interest current account shock (in percent of GDP)
- Growth shock (in percent per year)

### Relevant macro context and projections from the staff report and supplement
- Real GDP growth in 2014: Staff Proj. 4.8; Actual Prel. 4.8
  - Final domestic demand: Staff Proj. 3.8; Actual Prel. 2.9
  - Private consumption: Staff Proj. 0.8; Actual Prel. 1.1
  - Public consumption: Staff Proj. 6.7; Actual Prel. 0.1
  - Fixed investment: Staff Proj. 10.0; Actual Prel. 11.3
  - Change in stocks (contribution to growth): Staff Proj. 0.1; Actual Prel. 0.5
  - Net exports (contribution to growth): Staff Proj. 1.9; Actual Prel. 2.2
    - Exports: Staff Proj. 8.0; Actual Prel. 12.6
    - Imports: Staff Proj. 7.8; Actual Prel. 13.2
- Preliminary GDP for 2014: "growth of 4.8 percent y/y"; Gross National Product recorded a "5.2 percent" increase on the year with net factor income payments to nonresidents rising by "2.7 percent".
- Tax revenues: rose by "16 percent y/y" in the first two months of 2015, exceeding the monthly profile by "5.4 percent".
- Fiscal projection: budget on track for a deficit of "2.7 percent of GDP" in 2015 (enabling exit from the EU’s Excessive Deficit Procedure).
- Property and banking indicators:
  - Commercial real estate values up "30.7 percent y/y" in 2014.
  - House prices rose "16.3 percent y/y" in 2014.
  - Some "14.8 percent" of primary dwelling mortgages remain in arrears.
  - Overall nonperforming loans still amount to about "one-quarter" of total bank loans.

### Executive Board and staff policy recommendations and assessments
- Priority: maintain solid growth through continued prudence in fiscal and financial policies to build policy space and address banking and housing legacy issues.
- Fiscal policy guidance:
  - Endorsement of balancing the structural budget over the cycle through a phased and steady adjustment.
  - Calls for careful calibration of revenue and expenditure measures.
  - Encourage efforts to further broaden the tax base, contain the public wage bill, and improve targeting of social programs.
  - Merit in saving windfall revenue for debt reduction and reviewing public investment to ensure adequacy and high quality in support of potential growth.
- Financial sector and banking recommendations:
  - Take further decisive steps to resolve cases of prolonged arrears to address private debt overhangs and promote credit flows.
  - Greater utilization of insolvency procedures recommended.
  - Banks should take early actions to address capital quality issues ahead of new rules on eligible regulatory capital becoming effective.
  - Explore nonbank financing options with appropriate supervision and regulation, while remaining vigilant to fiscal risks from state-sponsored financing vehicles.
- Macroprudential and housing measures:
  - Strengthen resilience of banks and borrowers to shocks, including property cycles.
  - Welcome recent steps to strengthen the regulation of residential mortgage lending.
  - Encourage close supervision of rapid commercial property price rises, supported by proactive use of macro-prudential tools.
  - Reforms of the construction sector and residential rental markets (e.g., implementing Construction 2020 initiatives) to moderate property cycles, modernize planning, attract rental investment, and facilitate labor mobility.

### Selected headline indicators (from "Ireland: Selected Economic Indicators, 2010–16")
- Real GDP (annual): 2010 -0.3; 2011 2.8; 2012 -0.3; 2013 0.2; 2014 4.8; 2015 (Proj.) 3.5; 2016 (Proj.) 3.0
- Real GNP: 2014 4.1; 2015 (Proj.) 3.3; 2016 (Proj.) 2.7
- Unemployment rate (in percent): 2014 11.3; 2015 (Proj.) 10.0; 2016 (Proj.) 9.1
- General government gross debt (in percent of GDP): 2014 110.5; 2015 (Proj.) 109.0; 2016 (Proj.) 107.0
- General government net debt (in percent of GDP): 2014 86.5; 2015 (Proj.) 86.4; 2016 (Proj.) 85.3
- Current account (percent of GDP): 2014 3.4; 2015 (Proj.) 2.8; 2016 (Proj.) 3.4
- House prices: 2014 16.3 (annual change)
- GDP (in billions of euros): 2014 183.7; 2015 (Proj.) 190.5; 2016 (Proj.) 197.8

*Source: IMF staff report materials as presented in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1577.pdf_