Mission Concluding Statement 

Ireland—Concluding Statement of the Third Post-Program Monitoring Discussion

May 1, 2015

An International Monetary Fund (IMF) mission visited Dublin from April 27 to May 1 for the third Post-Program Monitoring discussion—part of the IMF’s regular surveillance of countries with IMF credit outstanding above 200 percent of quota. The visit was coordinated with the European Commission's third Post-Programme Surveillance discussion. At the end of the visit, IMF Mission Chief Craig Beaumont thanked the Irish authorities for candid and constructive discussions, and issued the following statement:

After years of difficult consolidation, there are strong public expectations for a recovery dividend. Yet the particularly high growth in 2014–15 is likely to slow somewhat and very favorable market conditions could deteriorate in time. Public debt remains elevated and the deficit further limits the capacity of the government to help absorb economic shocks. A measured amount of new spending and tax reforms each year, carefully focused on supporting lasting growth and job creation, must therefore fit within a steady fiscal adjustment toward budget balance. The Spring Economic Statement steers fiscal policy in broadly the right direction. Resolution efforts for the remaining large stock of distressed loans need to be intensified and sustained and supervision should continue to promote financial sector resilience to shocks including swings in foreign investment flows. Disposing of state holdings in the banks would clear the public debt incurred in supporting them.

1. Ireland’s economic rebound is in full swing, aided by quantitative easing. Growth is set to ease modestly to about 4 percent in 2015, with joblessness falling below 10 percent. Ireland’s high trade outside the euro area stands to benefit significantly from euro depreciation. Investment and hiring have led Ireland’s recovery since euro area uncertainties began to ease from mid-2012. Consumption is now picking up and improving household incomes and net worth support an ongoing revival. Yet debt overhangs continue to weigh on many households and SMEs. While near-term prospects have improved in the euro area, external risks remain.

2. Budget outturns in 2015 are off to an excellent start yet continued spending control is vital. Revenue grew at double digit rates in the first quarter while spending was kept within the budget profile. Hence the deficit is again on track to come in below target in 2015, at about 2.3 percent of GDP. Locking in this faster progress toward fiscal balance while growth is especially strong requires avoiding a repeat of past spending overruns.

3. Recent policy statements steer the budget in broadly the right direction. The Stability Programme targets a deficit of 1.7 percent of GDP in 2016. IMF staff estimate that the implied structural primary adjustment is modest, at about ¼ percent of GDP. (These estimates use a different potential output methodology than the EU). Stronger adjustment, of ½ percent of GDP, is appropriate in view of Ireland’s high public debt and strong growth, implying a deficit target of about 1.5 percent of GDP. Nonetheless, it appears most likely that revenue could exceed the prudent official projections; such overperformance must be saved to ensure an adequate pace of adjustment. Beyond 2016, the macroeconomic framework is sound and debt could fall faster than projected in the event of the disposal of Government stakes in the banking sector. Transparency would be enhanced by also providing deficit and debt projections consistent with the stated policy to limit fiscal adjustment to the minimum under EU fiscal rules.

4. The limited fiscal space in coming years should be used to support durable growth. Demographic pressures imply rising education and healthcare needs. Higher capital spending will also be required over time to avert growth bottlenecks. It is therefore critical that any unwinding of savings in public sector wages be gradual and that efficiency gains continue. Tax reforms should be focused on areas most supportive of job creation and productivity while protecting progress in tax base broadening. Steps to raise revenues would help address these pressures while protecting adjustment.

5. Bank health continues to improve yet challenges remain. Operating profitability has improved but remains low. Declining funding costs will help. It is also important that loan pricing is adequate to support credit growth and cover future loan losses, including the high costs of collateral realization. The value of nonperforming loans fell a sizable 19 percent in 2014, led by the commercial real estate and SME loan books, but they remain high at 23 percent of loans. Provisioning cover was stable despite significant write-backs that largely reflected improved collateral values.

6. Completing the resolution of impaired mortgage loans will require intensified and sustained efforts. The CBI’s targets gave needed impetus to solutions for mortgage distress. However, many loans are still moving into very long term arrears. Solutions will vary by cohort. Resolution of buy-to-let loans where rents are accruing to banks and contractual provisions are strong should be encouraged through continued intensive supervision. Primary dwelling mortgages in deep arrears pose a greater challenge, with many cases of weak bank-borrower engagement generally resulting in recourse to lengthy legal procedures. To advance restructuring in cases where that is feasible, close supervision of areas where banks can improve needs to be complemented by steps to make legal proceedings more efficient and to increase utilization of the personal insolvency regime.

7. Macro-financial stability should continue to be protected, especially given strong foreign interest in Irish assets. The recent adoption of mortgage lending regulations will contribute importantly to stability by underpinning bank and household financial resilience. Close monitoring of the booming commercial property market is warranted, even though at this time domestic banks are not a major source of new financing.

8. Disposing of state shareholdings in the banks would clear the public debt incurred in supporting them. The successful sale of PTSB shares underscores the scale of bank repair that has been achieved and the supportiveness of market conditions. Early steps to enhance AIB’s capital structure would help prepare the bank for sale at a time when the authorities consider market conditions to be conducive.