Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Ireland
IMF News, June 24, 2009
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- Published: June 24, 2009
Background
- Ireland experienced a property-driven boom followed by a painful adjustment as internal imbalances unwound.
- Key developments and vulnerabilities:
- Easy credit fostered a property bubble, with banks’ exposures to property lending soaring and reliance on wholesale funding intensifying.
- Rapid wage growth eroded international competitiveness.
- GDP grew in 2007 at a brisk 6 percent; growth began to slow early in 2008 and decelerated further after the failure of Lehman Brothers in September 2008.
- Recent data (as of the PIN) point to further deceleration in 2009.
- Banking sector stress:
- Asset quality deterioration concentrated in property development.
- Global financial crisis tightened access to wholesale funding.
- Irish bank stock prices fell sharply relative to the overall stock index, more so than in other eurozone countries.
- Extensive government support has been vital to maintaining financial stability.
- Fiscal developments:
- Strong growth and buoyant revenues prompted tax reductions and expanded public expenditures that proved unsustainable.
- After a decade of close-to-balance-or-surplus positions, the general government deficit was 7 percent of GDP in 2008 as property-related revenues collapsed.
- The structural deficit is estimated at 12½ percent of GDP in 2008.
- Gross public debt reached 43 percent of GDP.
- Authorities have taken consolidation measures and laid out a multi-year plan to restore fiscal health.
Executive Board Assessment — Findings and Recommendations
- Overall diagnosis:
- Ireland was hit particularly hard by the global crisis, reflecting vulnerabilities built up during the boom and the economy’s openness to global shocks.
- Critical macroeconomic imbalances included unsustainable property prices, high bank exposure to property lending, reliance on wholesale funding, and declining international competitiveness.
- Priorities identified by Directors:
- Restore the health of the financial sector.
- Ensure sustainability of public finances.
- Enhance external competitiveness and medium-term growth potential.
- Financial sector recommendations and observations:
- Commended scale and speed of authorities’ response; efforts will need to be sustained over an extended period.
- Supported restructuring efforts including establishment of the National Asset Management Agency (NAMA).
- Underscored importance of adequate design and timely implementation of NAMA.
- Advised consideration of risk-sharing structures to assist with pricing distressed assets.
- Recommended NAMA be given legal and operational flexibility to address all classes of distressed bank assets.
- Noted that other bank restructuring options, including a greater equity interest by the government, should not be ruled out.
- Welcomed plans to strengthen the supervisory framework, including a macro-prudential approach blending systemic stability and institution-level stress management.
- Recommended intensified bank-by-bank surveillance beyond banks currently under deposit guarantee and stronger safeguards against related-party exposures.
- Called for rigorous assessments of banks’ overall capital adequacy and strengthened home-host supervisory cooperation.
- Considered that a special resolution regime for financial institutions would facilitate a speedy and less disruptive resolution of distressed banks.
- Fiscal policy recommendations and observations:
- Welcomed fiscal measures taken, including significant cuts in public sector wages, and ambitious medium-term consolidation plans.
- Noted the emergence of a large structural fiscal deficit after reassessment of the underlying balance, rising public debt, and fiscal burden from bank support; sustained adjustment over several years required.
- Stressed importance of composition of consolidation efforts to support a return to robust growth; generally concurred focus should be on expenditure reduction, possibly including further reduction of the public sector wage bill.
- A few Directors cautioned that consolidation should not undermine efforts to arrest the economic downturn.
- Recommended an effective institutional framework over time, including an appropriate fiscal rule and a medium-term expenditure plan detailing measures over the full planning horizon.
- Underscored importance of better targeting benefits for the vulnerable, broadening the tax base without hampering restoration of external competitiveness, and further pension reform.
- A few Directors expressed concern about using resources of the National Pension Reserve Fund for bank recapitalization.
- Competitiveness and growth:
- Economic growth will hinge on restoration of international competitiveness and reorientation toward high-productivity activities.
- With no scope for nominal exchange rate adjustment, flexible product and labor markets are an invaluable asset.
- Welcomed authorities’ commitment to restore wage cost competitiveness and their plans for infrastructure and R&D investment.
- A few Directors cautioned that falling nominal wages could impair domestic demand and accelerate deflation.
Ireland: Selected Economic Indicators (2003–2008)
- Real Economy (change in percent)
- Real GDP: 2003: 4.5; 2004: 4.7; 2005: 6.4; 2006: 5.7; 2007: 6.0; 2008: -2.3
- Real GNP: 2003: 5.9; 2004: 5.8; 2005: 6.3; 2006: 4.1; 2007: (blank in source); 2008: -3.1
- Domestic demand: 2003: 3.9; 2004: 4.3; 2005: 8.7; 2006: 6.1; 2007: 3.7; 2008: -5.7
- Exports of goods and services: 2003: 0.6; 2004: 7.5; 2005: 5.2; 2006: 6.8; 2007: (blank in source); 2008: -0.4
- Imports of goods and services: 2003: -1.6; 2004: 8.5; 2005: 8.2; 2006: (blank in source); 2007: -4.4; 2008: (blank in source)
- HICP: 2003: 4.0; 2004: 2.3; 2005: 2.2; 2006: 2.7; 2007: 2.9; 2008: 3.1
- Unemployment rate (in percent): 2003: 4.4 (other years blank in source)
- Public Finances (percent of GDP)
- General government balance: 2003: 0.3; 2004: 1.4; 2005: 1.5; 2006: 0.2; 2007: -7.1; 2008: (blank in source)
- Structural balance 1/ (in percent of potential GDP): 2003: -5.0; 2004: -5.4; 2005: -8.7; 2006: (blank in source); 2007: -12.5; 2008: (blank in source)
- General government debt: 2003: 31.1; 2004: 29.4; 2005: 27.3; 2006: 24.7; 2007: 24.8; 2008: 43.2
- Money and Credit (end-period, percent change)
- M3 2/: 2003: 9.8; 2004: 22.5; 2005: 22.0; 2006: 28.5; 2007: 9.6; 2008: -2.1
- Private sector credit 3/: 2003: 17.9; 2004: 26.6; 2005: 28.8; 2006: 25.9; 2007: 17.0; 2008: 6.6
- Interest rates (end-period)
- Three-month treasury bill: 2003: 2.1; 2004: 2.5; 2005: 3.4 (other years blank in source)
- 10-year government bond yield: 2003: 4.6; 2004: 3.3 (other years blank in source)
- Balance of Payments (percent of GDP)
- Trade balance (goods and services): 2003: 15.4; 2004: 14.2; 2005: 11.7; 2006: 10.3; 2007: 11.5; 2008: (blank in source)
- Current account: 2003: 0.0; 2004: -0.6; 2005: -3.5; 2006: -3.6; 2007: -4.5; 2008: (blank in source)
- Reserves (in billions of euros)
- 2003: 0.7 (other years blank in source)
- Exchange Rate
- Exchange rate regime: (entry in source: Euros per U.S. dollar)
- Euros per U.S. dollar: 2003: 0.9; 2004: 0.8 (other years blank in source)
- Nominal effective rate (1999Q1=100): 2003: 101.9; 2004: 104.5; 2005: 104.1; 2006: 104.4; 2007: 107.4; 2008: 113.0
- Real effective rate (1999Q1=100, CPI based): 2003: 112.6; 2004: 115.8; 2005: 115.4; 2006: 116.0; 2007: 120.1; 2008: 125.5
- Notes included in source:
- 1/ In percent of potential GDP.
- 2/ The methodology used to compile M3 has been amended in line with Eurosystem requirements. Therefore, there is a break in the series.
- 3/ Adjusted change, which includes the effects of transactions between credit institutions and non-bank international financial companies and valuation effects arising from exchange rate movements.
- Sources cited in the PIN: Central Statistics Office; Department of Finance, Datastream and IMF International Financial Statistics.
Public Information Notice No. 09/79 — June 24, 2009.