Public Information Notice: IMF Concludes 2003 Article IV Consultation with Ireland

August 6, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2003 Article IV consultation with Ireland is also available.

On July 30, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ireland.1


Over the past decade, Ireland has experienced a sustained expansion in output and employment that has raised its per capita income above the EU average. During 1991-2001, income growth, measured by real GNP, averaged 6.5 percent, while the unemployment rate plummeted from almost 16 percent to below 4 percent. The fiscal position strengthened, with the public debt ratio falling from close to 100 percent of GDP in the early 1990s to well below 40 percent of GDP in 2001. Substantial gains in competitiveness, particularly in the multinational dominated manufacturing sector, kept the current account in surplus or close to balance.

Growth began to slacken in mid-2001 as the global economy started to slow. While GDP growth remained robust at 6.9 percent in 2002, GNP growth slowed sharply from 10.2 percent in 2000 to just 0.1 percent in 2002. Private consumption and export growth weakened from their previous rapid pace while investment increased marginally mainly because strong residential investment offset a fall in business investment. Yet the unemployment rate rose only slightly to 4.4 percent, while the current account remained in a small deficit. Recent indicators suggest that economic activity remains sluggish in 2003—industrial confidence and orders have fallen, retail sales remain weak, and consumer and service sector confidence have deteriorated further. Inflation eased to 3.8 percent in June, still well above the euro area average of 2 percent, while wage growth moderated somewhat.

Monetary conditions have remained easy for several years. Interest rates fell markedly in the run up to joining European Monetary Union in 1999 and credit to the private sector rose sharply. With inflation persistently above the euro area average, short- term interest rates have been negative since late 2001. Credit to households has grown in real terms at rates of 15-30 percent each year since 1996, but the average household debt to income ratio is still not high by international comparison. The decline in interest rates and increasing financial sector competition as well as rapidly rising disposable income and high rates of household formation have fuelled a spectacular increase in house prices, with real house prices rising by over 130 percent since 1993.

The prolonged economic expansion bolstered fiscal revenue in the late 1990s, allowing the government to maintain sizeable budget surpluses, while simultaneously cutting taxes and increasing expenditure rapidly. As growth slowed in 2001, revenue fell short of expectations, but spending rose sharply (by 12.6 percent in real terms), shifting the fiscal balance to a structural deficit for the first time in many years. In 2002, when adjusted for the effects of the economic cycle, the general government balance turned out somewhat weaker than budgeted mainly due to the underperformance of structural revenues—particularly in personal and corporate taxes. After an initial rapid increase, expenditure was brought under control and ended the year below budget. The cyclically-adjusted general government deficit increased to 1.8 percent of GDP, resulting in a fiscal expansion in excess of 1 percent of GDP.

Staff projects a gradual recovery in line with the expected pick up in global growth. Real GNP is projected to grow by 1.5 percent in 2003 and to rebound to about 3 percent in 2004 as private consumption and exports recover in late 2003, with the improvement in external demand. Given the information and communication technology overhang, investment would continue to decline in 2003 before reviving in 2004 as growth prospects improve. Monetary conditions would remain supportive, as the effects of euro appreciation so far would be largely offset by the European Central Bank's recent rate cuts. Over the medium-term, output is projected to grow at a trend rate of about 4-5 percent a year reflecting slower labor force and productivity growth compared with the late-1990s due to income convergence and lower foreign direct investment flows following the bursting of the global ICT bubble.

Executive Board Assessment

Directors commended the Irish authorities for their exemplary track record of sound economic policies, which have resulted in a dynamic, open, and robust economy—with growth notably above the EU average over the past decade—and resilience to external shocks. Directors saw signs, however, that trend growth was beginning to moderate toward euro-area levels, with implications for macroeconomic policy implementation and the expectations of economic agents. The likelihood of sustained slower growth in the period ahead calls for a sharper policy focus on reducing inflation further toward the euro-area average, improving competitiveness,

safeguarding financial sector soundness and flexibility, and securing the medium-term fiscal position, in line with the Stability and Growth Pact (SGP) objective.

Directors expected activity to pick up with the recovery in world demand towards the end of this year and to accelerate thereafter to a sustainable rate. Nevertheless, they saw some risks to the outlook. The global recovery could be more anemic than expected and the euro may continue to appreciate, adversely affecting competitiveness and employment, particularly in indigenous, employment-intensive industries. A sharp rise in unemployment could, moreover, pose risks to the housing market and to the financial sector. Given Ireland's prolonged credit boom, Directors noted that there is a significant risk that house prices could be overvalued, although financial sector risks appear to be manageable.

Directors observed that high levels of capitalization and profitability have strengthened banks' capacity to absorb the effects of potential macroeconomic shocks without systemic distress. However, credit risks related to investor-owned housing properties, the concentration of exposures in the commercial property market among a few institutions, and the health of the insurance industry merit close attention. Directors stressed the need for continued supervisory vigilance to ensure the stability of the financial system, and they welcomed the unification of supervision under the Irish Financial Services Regulatory Authority (IFSRA) within the central bank, which has enhanced the supervisory regime. They also welcomed the authorities' plans to improve insurance supervision and the consolidated supervision of complex financial groups. Directors encouraged the authorities to continue strengthening the monitoring of forward-looking systemic risks.

Directors emphasized that wage growth must moderate in order to preserve external competitiveness and avoid risks to output and employment. They welcomed the new national wage agreement in this regard, but emphasized that the wage norm for the agreement's second phase would need to reflect closely changes in productivity and economic conditions. With temporary factors adding to inflation this year, Directors felt that real wage declines may need to be accepted in that phase, especially in the public sector and publicly-owned enterprises. Directors noted the importance of having substantive and publicly verifiable evidence of productivity improvements in order to support benchmarking pay increase recommendations. They suggested that the compensation system for public pay be based on private sector comparators, and that merit and skill differences be taken into account.

Following several years of procyclical fiscal expansion, Directors welcomed the somewhat contractionary fiscal stance envisaged for 2003. Since structural revenue could continue to underperform, they stressed that spending should be held to budgeted levels, and that any revenue shortfalls be offset by restraint with respect to the wage bill and transfers; given the pressing need to invest in infrastructure, capital spending should be protected. Barring major adverse shocks to output and employment, the fiscal stance should—at a minimum—be neutral in 2004, with no increase in the cyclically-adjusted deficit, and with the automatic stabilizers allowed to operate freely.

Directors agreed that the authorities' medium-term fiscal target of overall structural balance is appropriate. However, the authorities should not rely on continued strong output growth to eliminate the deficit. In the view of most Directors, implementation of moderate contractionary measures once the economic recovery is established, would protect policy credibility and secure the path toward achieving the medium-term objective. However, a few Directors noted the urgency of targeting the medium-term balance decisively and early, and recommended that adjustment measures be taken soon.

Directors observed that restraining current expenditure was preferable to increasing taxes as a means to improve the fiscal balances. In that vein, they urged limiting public sector wage increases, raising productivity, and continuing to strengthen public expenditure management across all levels of general government. They noted that greater competition and private provision of public services could also foster efficiency and reduce costs. They welcomed the recently announced plans to reform healthcare. If a compelling need to address taxation arose, broadening the tax base and the scope of user fees, with targeted transfers to the poor when appropriate, would be less distorting than increasing tax rates. Directors drew attention to the considerable improvements to the tax system made in recent years, which should be preserved.

Directors considered that the adoption of a formal medium-term fiscal framework at the general government level would improve transparency and policy predictability. Such a framework could include an overall fiscal constraint consistent with the SGP, and budget projections based on a medium-term expenditure framework. Directors welcomed the planned multi-year departmental capital spending envelopes, and recommended extending them to cover all non-cyclical primary expenditure, with safeguards to protect capital spending from budget pressures. They urged more extensive publication of public service commitments and ex-post evaluations of the effectiveness of public services. A few Directors suggested that the authorities undertake a fiscal Reports on Observance of Standards and Codes to identify ways to further improve fiscal transparency.

Directors agreed that enhancing competition and lowering regulatory obstacles will be important for sustaining medium-term productivity and income growth. Regulatory reform should be oriented firmly toward serving consumer welfare. Directors welcomed the strengthening of the Competition Authority's powers and the legal framework governing competition. They also welcomed the Competition Authority's scrutiny of restrictive practices in services, and encouraged the government to address the issues identified.

Directors noted the progress made in the provision of statistics, and encouraged the authorities to make further improvements, especially regarding the timeliness of general government accounts, and development of a national earnings index and sectoral balance sheets.

Directors encouraged the authorities to adopt a more supportive stance within the EU in favor of trade liberalization, in particular on the Common Agricultural Policy. They commended the authorities for their progress toward achieving the U.N.'s target for official development assistance by 2007.

Ireland: Selected Economic Indicators






2003 1/

Real Economy (change in percent)


Real GDP






Real GNP






Domestic demand






Exports of goods and services






Imports of goods and services












Unemployment rate (in percent)







Public Finances (percent of GDP) 2/


General government balance






Structural balance 3/






General government debt







Money and Credit (end-year, percent change)


M3E 4/





8.8 5/

Private sector credit





16.0 5/


Interest rates (end of period)







2.1 6/

10-year government bond yield





3.8 6/


Balance of Payments (percent of GDP)


Trade balance (goods and services)






Current account






Reserves (gold valued at SDR 35 per ounce

end of period, in billions of SDRs)





2.8 5/


Exchange Rate


Exchange rate regime

Member of euro area

Present rate (July 30, 2003)

US$ per euro 1.1346


Nominal effective rate (1995=100)





95.9 7/

Real effective rate (1996=100, CPI based)





106.6 7/

Sources: Central Statistics Office; Department of Finance, Datastream and IMF International

Financial Statistics

1/ Staff projections, except where noted.

2/ In percent of GDP. In 1999 the overall balance of 4.1 percent does not take account of

discharging future pensions liabilities at a cost of 1.8 percent of GDP.

3/ The balance for 2002 excludes UMTS receipts of 0.2 percent of GDP.

4/ ME3 was discontinued in December 1998 and the methodology for calculation of Ireland's

contribution to the Euro area money supply was amended in January 1999.

5/ End-May 2003.

6/ End-June 2003.

7/ End-April 2003.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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