IMF Executive Board Concludes Sixth Post-Program Monitoring Discussion with Ireland
IMF News, February 3, 2017
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- Published: February 3, 2017
Executive Board assessment and conclusion
- On February 2, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Post-Program Monitoring Discussion with Ireland and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
- Despite risks to the outlook, Ireland’s capacity to repay the Fund is strong, given:
- robust economic and fiscal performance,
- large cash buffers,
- manageable financing needs, and
- favorable market financing conditions.
- Key risks noted:
- Brexit-related risks,
- a sustained low growth-low inflation environment in Europe,
- external political uncertainties and rising anti-globalization sentiment,
- ongoing developments in corporate tax treatment at the international level,
- challenging political context for the new minority government.
Recent economic performance and outlook
- 2016 performance:
- Output expanded by 4.8 percent y/y in the first three quarters of 2016, mainly driven by domestic demand.
- Broad-based employment gains lowered the unemployment rate to 7.2 percent in December.
- Headline inflation hovered in negative territory during most of the year, reflecting declining energy prices.
- The current account surplus widened somewhat in the first three quarters of 2016.
- Outlook:
- Robust domestic demand is projected to drive continued healthy growth and support further moderation in unemployment.
- Inflation, which turned slightly negative in 2016, is expected to edge up gradually.
- The impact of multinational operations on headline GDP complicates assessment of domestic activity; staff welcomes work on alternative measures for domestic activity.
Fiscal policy findings and recommendations
- Fiscal targets and stance:
- The government’s fiscal targets are broadly appropriate.
- The moderate adjustment planned in 2017 strikes a balance between deficit reduction and addressing public expectations for a growth dividend.
- Fiscal prudence recommended:
- Expenditure increases beyond those already programmed would need to be offset by tax increases or cuts in other spending to meet the deficit target.
- Maintain moderate growth in expenditures, save any revenue windfalls, and ensure potentially temporary revenue gains are not used to fund permanent expenditure increases.
- Authorities’ commitments welcomed:
- Reach medium-term deficit target of 0.5 percent of GDP by 2018.
- Establish a “rainy-day” fund beginning in 2019.
- Reduce debt-to-GDP to 45 percent within a decade.
- Targeted support for growth:
- Within a tight envelope, fiscal policy could be more supportive of growth through well-targeted increases in capital expenditure.
- Capital expenditure is noted as already well below peers; well-targeted increases are needed to buttress competitiveness and support welfare (economic and social infrastructure).
- Housing and tax guidance:
- Housing Action Plan and related efforts to address housing shortages, high rents, and homelessness are welcome.
- Fiscal incentives related to housing should be limited and closely monitored to avoid fueling demand and price pressures.
- Plans for a phased elimination of the Universal Social Charge should not come at the expense of the breadth and stability of the tax base.
Banking sector, nonperforming loans, and financial stability
- Banking sector conditions:
- Credit to the private sector has continued to fall but at a declining rate.
- Balance sheet repair of domestic banks has continued but profitability remains weak.
- Capital and liquidity positions of domestic banks have improved but, with low underlying profitability, banks remain vulnerable to shocks.
- The UK’s decision to leave the EU could put further pressure on domestic banks’ profitability.
- Bank restructuring and government stakes:
- Disposal of the government’s stakes in Irish banks, which would support public debt reduction, should continue once market conditions are supportive.
- Nonperforming loans (NPLs) and mortgage arrears:
- NPLs are declining overall, but resolution of deep mortgage arrears should be accelerated.
- Intensified supervisory oversight of banks’ internal management of NPL resolution should continue.
- The “advice and arrears” scheme recently introduced by the government shows promise in improving borrower-creditor engagement.
- Further steps to make legal proceedings more efficient are critical to accelerate resolution.
Macroprudential policy and housing market risks
- Continued vigilance recommended to safeguard macro-financial stability, especially regarding the property market.
- Macroprudential measures and recalibration:
- The macroprudential measures introduced in 2015 strengthen resilience of banks and households to adverse shocks.
- The recalibration of the macroprudential framework is reasonable given early experience and current housing market dynamics.
- Progress toward full implementation of the CCR and replacing the LTI limit with a DTI limit remains key to ensure prudent lending (DTI better captures borrowers’ repayment capacity).
Ireland: Selected Economic Indicators, 2014–18 (Est. / Projections)
- Output/Demand (Annual percentage change, constant prices, unless noted otherwise)
- Real GDP: 2014: 8.4; 2015: 26.3; 2016: 4.6; 2017: 3.2; 2018: (blank)
- Domestic demand: 2014: 7.7; 2015: 9.9; 2016: 6.8; 2017: 3.4; 2018: (blank)
- Public consumption: 2014: 5.4; 2015: 1.1; 2016: 5.8; 2017: 2.5; 2018: 2.0
- Private consumption: 2014: 1.7; 2015: 4.5; 2016: 3.1; 2017: 2.9; 2018: (blank)
- Gross fixed capital formation: 2014: 18.1; 2015: 32.5; 2016: 11.7; 2017: 6.2; 2018: 5.0
- Exports of goods and services: 2014: 14.4; 2015: 34.5; 2016: 2.1; 2017: 4.1; 2018: (blank)
- Imports of goods and services: 2014: 15.3; 2015: 21.7; 2016: 5.1; 2017: (blank); 2018: (blank)
- Potential Growth: 2014: 3.7; 2015: 24.6; 2016: 3.5; 2017: 3.3
- Output Gap: 2014: -1.7; 2015: -0.4; 2016: 0.6; 2017: 0.5; 2018: 0.4
- Prices
- Inflation (HICP): 2014: 0.3; 2015: 0.0; 2016: -0.2; 2017: 0.8; 2018: 1.4
- GDP deflator: 2014: -1.2; 2015: 4.9; 2016: -0.9
- Employment and wages
- Employment (ILO definition): 2014: 2.6; 2015: 1.5; 2016: (blank)
- Unemployment rate (percent): 2014: 11.3; 2015: 9.5; 2016: 7.9; 2017: 7.1; 2018: 6.9
- Nominal wages: 2014: 0.1; 2015: 0.9; 2016: 2.3
- Public Finance, General Government (In percent of GDP)
- Revenue: 2014: 34.1; 2015: 27.6; 2016: 27.2; 2017: 27.4; 2018: 26.9
- Expenditure: 2014: 37.8; 2015: 29.5; 2016: 28.2; 2017: 27.9
- Overall balance: 2014: -3.7; 2015: -1.9; 2016: -0.5; 2017: -0.3
- Primary balance: 2014: 0.7; 2015: 1.8
- Structural balance (percent of potential GDP): 2014: -3.2; 2015: -1.1; 2016: -0.7
- General government gross debt: 2014: 105.4; 2015: 78.7; 2016: 76.4; 2017: 75.0; 2018: 73.6
- Monetary and financial indicators (In percent)
- Bank credit to private sector (growth rate): 2014: -16.8; 2015: -13.2; 2016: …
- Deposit rates: 2014: 1.9; 2015: 1.3
- Government 10-year bond yield: (blank)
- Balance of payments
- Trade balance (goods): 2014: 21.1; 2015: 43.2; 2016: 41.6; 2017: 42.2; 2018: 42.0
- Current account balance: 2014: 10.2; 2015: 7.8; 2016: 6.0; 2017: 5.7
- Gross external debt: 2014: 926.4; 2015: 870.8; 2016: 830.5; 2017: 788.6; 2018: 744.1
- Sources for the table: Central Statistics Office; Department of Finance; Eurostat; and IMF staff.
IMF Executive Board concludes sixth Post-Program Monitoring discussion with Ireland (Press Release No. 17/35, February 3, 2017).