Ireland: Staff Concluding Statement of the 2021 Article IV Mission

IMF News, May 12, 2021

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Canonical URL: Ireland: Staff Concluding Statement of the 2021 Article IV Mission

Pandemic impact was highly asymmetric: the domestic sector contracted by about 10 percent in 2020 while multinational enterprises (MNEs) continued to grow strongly, driving overall GDP growth to 3.4 percent.
Unemployment reached 30 percent at the peak of the first wave.
MNEs-related activities in the IT and manufacturing sectors (mostly pharmaceuticals) grew by 18 percent in 2020, softening the blow to the economy and public finances.
GDP growth for 2021 is projected at 4.6 percent.
A two-speed recovery is likely, with domestic activities partly recovering as containment measures are eased and adaptability to remote working increases.
Key risks to the outlook:
- Uncertainties surrounding the pandemic.
- Execution of post-Brexit trade arrangements and remaining non-tariff trade impediments given Ireland's strong linkages with the U.K.
- Likely changes in international taxation.

Fiscal package envelope: around 10 percent of GDP (18 percent of GNI*) for 2020-21.
The package composition: unemployment benefits, wage subsidies, grants, tax deferrals, tax cuts, and loan guarantees; had a significantly larger share of direct support compared to European peers.
Overall deficit for 2020 was contained at about 5 percent of GDP (8.4 percent of GNI*) due to strong growth in corporate income tax intake and resilient personal income tax revenue.
Policy guidance:
- Avoid premature withdrawal of support; taper and gradually withdraw temporary measures to avoid cliff-edge effects.
- Shift income support measures to become increasingly conditional on re-skilling and toward subsidizing new hiring in expanding sectors.
- Target business support increasingly to affected but viable firms.
- Broaden the tax base eventually to help finance productivity-enhancing investment in human and physical capital.
- Welcome the establishment of the Commission on Taxation and Welfare.
- Continue the Spending Review and Performance Budgeting processes and strengthen implementation of infrastructure projects and maintenance of public assets.
- Establishment of the National Investment Office has helped improve spending efficiency.

The Central Bank of Ireland (CBI) actions:
- Released the countercyclical capital buffer for banks.
- Set out clear expectations around industry-led debt moratoria operation.
Outcomes and near-term priorities:
- Regulatory actions helped stabilize credit conditions and complemented ECB policy support.
- Lenders should engage constructively with borrowers in financial distress to ensure appropriate tailored solutions.
- Supervisory focus should remain on timely recognition of problem assets and developing capacity to resolve rising NPLs.
- Insolvency and bankruptcy systems should be kept under review and enhanced as needed.
- Over the medium term, cost reduction and greater use of digital technologies could help raise banks' low profitability and reduce lending rates.
- Strategic initiatives recently announced by two banks are likely to lead to their withdrawal from the Irish market; sustainability of banks’ business models should continue to be a key supervisory focus, particularly actions to achieve greater cost efficiency.

Although sizeable redemption pressures at the onset of the crisis receded quickly and direct exposures to the domestic economy remain limited, the large absolute size of the sector relative to the domestic economy and liquidity mismatches call for constant vigilance.
Recommendations:
- Strengthen regulatory framework for investment and money market funds to mitigate spillover and reputational risks.
- Improve data collection and strengthen risk management across the sector, including system-wide liquidity risk management.
- Develop the macroprudential framework in close coordination with other European regulators.

An inclusive and sustainable recovery requires raising labor participation and productivity through better education and vocational training.
To minimize long-term unemployment increases:
- Strengthen active labor market policies as support measures are withdrawn, including re-training and employment placement services.
- Utilize initiatives such as the online educational portal for upskilling and retraining opportunities.
- Empower women to raise their low participation in the labor market, including by increasing availability of affordable childcare facilities.

Addressing shortages in affordable housing requires a multi-pronged approach:
- Releasing more land for development.
- Streamlining approval processes for permits and re-zoning.
- Assessing incentives to build rental properties.
- Increasing supply, including of social housing.
Government efforts are welcome but more needs to be done.

Continued effort is needed to meet the ambitious National Development and Climate Action plans.
The recently legislated higher carbon tax, with a trajectory to 2030, will help finance the effort.
Policy options to accelerate climate-friendly adoption during the post-COVID recovery:
- Boost public investment in transportation networks and renewable energy.
- Subsidize building renovation to achieve greater energy efficiency.
- Support low-emission agronomic technologies and carbon sequestration, including through the restoration of peatlands.
Sector-specific policies will help reduce costs and protect vulnerable groups in the transition.

An IMF team conducted virtual meetings during April 26– May 7, 2021.
The mission was led by Khaled Sakr and met with Minister of Finance Paschal Donohoe; Minister of Public Expenditure and Reform Michael McGrath; Governor of the Central Bank of Ireland Gabriel Makhlouf; other senior officials; parliamentarians; and representatives of labor unions, the business community, the banking sector, and industry.
Press contact: Meera Louis, PHONE: +1 202 623-7100, Email: MEDIA@IMF.org

Source: Ireland: Staff Concluding Statement of the 2021 Article IV Mission