IMF Executive Board Concludes 2023 Article IV Consultation with Ireland

IMF News, December 15, 2023

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The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ireland.
Ireland’s economy has shown "remarkable resilience" in the face of consecutive shocks.
After two years of impressive performance, domestic activity slowed but "remained solid," supported by continued strength in private consumption.
Exports decelerated markedly as global demand for pharmaceutical and contract manufacturing exports receded from a very high base in 2022.
Inflation is easing but remains above the ECB target, and the labor market remains tight.
The fiscal position has strengthened considerably on the back of strong tax revenues, though headline numbers mask underlying vulnerabilities.
The large and complex financial sector has remained resilient so far and will continue to be tested by tighter financial conditions.

The outlook is described as a "soft landing."
Growth (measured by Modified Gross National Income):
- Projected to moderate to 2½ percent in 2023-24 from a very high base.
- Expected to converge to potential at 2¼ percent over the medium term.
Inflation:
- Expected to trend down, "reaching 2 percent toward late 2025."

The Irish economy is "well-positioned to achieve a soft landing."
Growth to moderate to a still solid level in 2023-24 as tighter financial conditions, domestic capacity constraints, and weakening external demand weigh on the economy.
Inflation anticipated to further trend down and reach the target by late 2025.
The external position in 2022 is assessed to be "moderately stronger than the level implied by fundamentals and desirable policies."

Continued fiscal prudence is warranted to complement monetary tightening and to build adequate buffers.
Specific recommendations:
- Avoid adding to aggregate demand amid still elevated inflation; save tax revenue overperformance.
- 2023 fiscal stance is appropriate.
- 2024 Budget is slightly expansionary but still targets a sizable surplus.
- Phase out one-off cost of living measures as inflation recedes.
- Given uncertain and volatile CIT revenues, large exposure to shocks, and future spending pressure, continue to build buffers.
Support growth-enhancing investment and broaden the tax base:
- Strengthen public investment efficiency and ensure timely execution of the capital budget to deliver on the National Development Plan while ensuring value for money.
- Expedite the planning permission process, modernize regulations, and streamline the judicial review process.
- Prioritize public investment within an appropriate fiscal stance.
- Scope to expand and diversify tax revenues, including by improving the PIT system and simplifying the VAT system.
Authorities’ decision to save part of excess CIT revenues in two savings funds is "welcome."
With EU fiscal rules unlikely to be binding for Ireland, the authorities should reflect on an appropriate anchor for their longer-term fiscal framework, beyond the current spending rule for 2022-26, and how the new savings funds can be integrated within this framework.

Tighter financial conditions, persistent inflation, and rising vulnerabilities in the CRE market with linkages to leveraged non-banks call for continued heightened vigilance.
Recommendations and observations:
- Intensified supervision of credit and liquidity risks for domestic retail banks should remain.
- Continued close surveillance of large international banks’ vulnerabilities to funding stress is warranted.
- Continue close monitoring of credit conditions and financial stability risks to assess the need for future adjustment of macroprudential policy settings.
- The IMF welcomes the Central Bank of Ireland’s (CBI) decision to gradually increase the CCyB to 1.5 percent.
- Mortgage measures should not be used to address broader housing affordability issues.

The authorities’ active efforts to strengthen oversight of Ireland’s large and complex MBF sector and to develop a macroprudential framework for non-banks are "commendable."
Key priorities:
- Close still significant data gaps about the sector and conduct risk analysis at a granular level, requiring intensified regional and international collaboration.
- The CBI’s introduction of macroprudential measures for Irish-domiciled property funds are essential to strengthen resilience to CRE shocks.
- Continue initiatives with regional and international institutions and other countries to develop macroprudential tools targeting risks from non-banks.

Executive Board Concludes 2023 Article IV Consultation with Ireland; Press Release No. 23/446; December 15, 2023.