IMF Survey : Ireland’s Economy Back from the Brink, But Continued Progress Needed
IMF News, December 19, 2013
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Bibliographic details
- Published: December 19, 2013
Overview and program outcome
- Publication date: December 19, 2013.
- The EU/IMF-supported program began in December 2010 and its successful completion has left Ireland "in a much stronger position" than at the start.
- Program success owed to full commitment by the Irish authorities and people, steady policy implementation, and close collaboration with EU and ECB counterparts.
Banking sector: stabilization, remaining weaknesses
- Immediate priority was to recapitalize and stabilize the banking system, achieved early in the program and stemming deposit outflows.
- Banking system had assets of almost 500 percent of GDP when the program started.
- Progress made in reducing banking system size and recapitalizing viable banks; NAMA (asset management company) was established to deal with large problem loans, especially in the property sector.
- Remaining issues:
- Nonperforming loans remain high and progress in resolving impaired assets has been slow.
- Bank profitability remains weak.
- Banks are not yet supporting the economy with adequate lending.
- More rapid progress in dealing with mortgage arrears (residential mortgages in arrears) would have been worthwhile.
Fiscal consolidation and public finances
- Budget consolidation started before the program.
- Over 2009–13, the structural primary deficit has been reduced by about 10 percentage points of GDP.
- Resulting trajectory:
- Ireland should be able to achieve a primary balance in 2014.
- Sovereign debt projected to peak at about 124 percent of GDP in 2013 and should soon be on a declining path.
- Households’ debts amount to almost 200 percent of disposable income.
- Ireland contributed €17.5 billion of the total program financing package of €85 billion.
Economic activity and labor market
- Signs of growth emerging and unemployment has started falling after peaking (unemployment kept rising until it peaked in early 2012).
- Growth and market signals:
- Export-driven growth was quite strong in 2011 at 2.2 percent.
- Market-confirming events included well-subscribed bond issues in January and March (a 10-year issue at a 4.15 percent yield, trading at about 3.5 percent).
- Projections:
- Growth projected to rise to about 1¾ percent in 2014—a little below consensus estimates.
- Growth projected to be about 2½ percent in the medium term.
- Revival of domestic demand expected to be modest in the near term and a protracted process due to strained private balance sheets and gradual easing of fiscal consolidation.
- Improving financial-sector health expected to support recovery, though near-term contributions from renewed lending are not expected to be significant.
Policy and institutional reforms
- Institutional reforms implemented:
- Strengthened medium-term fiscal framework.
- Established a credible and well-functioning fiscal council.
- Revamped regulation and supervision of the financial sector.
- Irish authorities released a medium-term economic strategy covering 2014 to 2020.
Euro-area context and market access
- Regaining market access began in mid-2012 with Treasury bills issuance and strengthened after policy signals such as ECB President Draghi’s Outright Monetary Transactions.
- Ireland benefited from improved euro-area conditions and its own steadfast policy implementation.
- Ireland’s prospects are closely tied to the eurozone: progress on demand and supply deficiencies in the eurozone, achieving the ECB’s inflation target, reducing fragmentation, and improving monetary union architecture are important for Ireland’s outlook.
Social and political impacts
- The bailout had a dramatic social and political impact: the negotiating government resigned, elections were held in February 2011, and a new coalition government formed in March 2011 with a strong mandate to implement the program.
- Social fallout intertwined with the banking crisis; program prevented a sharper economic deterioration that was likely at end-2010.
- Dialogue with labor unions and organizations dealing with vulnerable groups was conducted though some counterparts felt concerns were insufficiently addressed.
- Authorities were encouraged to design fiscal consolidation measures with fairness and equity in mind.
Five preliminary lessons for global policymakers (as stated)
1. Confront systemic banking crises quickly: identify viable vs nonviable institutions, resolve nonviable banks, and recapitalize and restructure viable ones; transparency (stress tests and asset-quality diagnostics) is critical. 2. It is unfair to place the burden of supporting banks primarily on domestic taxpayers while senior unguaranteed bond holders are paid out; imposing losses on senior unsecured creditors is increasingly accepted in later resolution principles. 3. Fiscal consolidation should be steady, gradually phased, and embedded in a well-specified medium-term plan that allows automatic stabilizers to operate; excessively rapid consolidation harms growth. 4. Feedback loops among weak balance sheets of banks, government, households, and companies can stagnate activity and increase deflationary pressures; breaking these loops may require greater union-wide solidarity in a monetary union. 5. Government design and ownership of program policies is critical for implementation and social/political cohesion; Irish-designed program components aided compliance.
Forward-looking priorities and recommendations
- Continue private balance sheet repair and fiscal consolidation; these processes will take time.
- Strengthen efforts to resolve nonperforming loans and mortgage arrears, improve bank profitability, and restore lending to support domestic consumption and investment.
- Pursue a balanced growth strategy that combines exports with a revival of domestic demand to create jobs and reduce unemployment.
- Maintain sound policies and implement the medium-term economic strategy for 2014–2020.
- In the eurozone context, pursue actions to reduce fragmentation, achieve the ECB’s inflation objective, and enhance monetary union architecture to support Ireland’s recovery.
IMF Survey : Ireland’s Economy Back from the Brink, But Continued Progress Needed — December 19, 2013