Public Information Notices
Ireland and the IMF
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The IMF Executive Board on July 2, 1997 concluded the 1997 Article IV consultation1 with Ireland.
Outward-oriented policies, financial discipline, wage moderation, and significant EU assistance have yielded dramatic progress for the Irish economy over the past decade. Since 1987, growth has averaged almost 5 percent per annum--the fastest rate in the EU--while inflation has been maintained consistently below the EU average.
The cornerstone of Ireland's growth performance has been an economic strategy focused on inward foreign investment in dynamic, export-oriented activities (such as microchips, software development, and pharmaceuticals) that has reaped the benefits of globalization and technological change. Ireland's success in attracting these investments reflects a stable macroeconomic environment, favorable costs, a youthful, fast-growing, and increasingly well-educated labor force, a business-friendly tax regime, and the country's position in the EU. Real GNP rose by almost 7 percent in 1996, led by domestic demand. Personal consumption rose by 6 percent, buoyed by income growth, and investment increased by 15 percent, reflecting strong residential and commercial construction. Although exports of goods and services rose by 10 percent, the current account surplus narrowed to 2 1/4 percent of GNP, reflecting an increase in capital goods imports.
Inflation has declined over the past year to 1.5 percent as of May 1997. This trend reflected exchange rate appreciation during 1996, a benign external price environment, and continued wage moderation. A new three-year centralized wage pact agreed in January 1997 stipulates wage increases averaging 3 percent per annum.
Fiscal policy in recent years has been geared to keeping the deficit comfortably within the Maastricht reference value of 3 percent of GDP. The 1996 general government deficit (GGD) was significantly lower than budgeted (0.9 percent of GDP compared with 2.6 percent), owing to a surge in corporate and other tax receipts as output growth exceeded expectations. The budget for 1997 targeted a GGD of 1 1/2 percent of GDP and a further decline in the debt ratio to 69 percent of GDP. Fiscal developments so far in 1997 have been encouraging, with strong growth in revenue suggesting that the GGD will turn out below 1 percent of GDP.
The 1997 budget was the first to be couched in a medium-term fiscal framework, which envisaged that the GGD would remain at about 1 1/2 percent of GDP through 1999. The new Government elected in June 1997 established more ambitious goals, announcing that provided its expectations for economic growth in the coming years (4-5 percent per annum) were fulfilled, the deficit would be eliminated within two-three years.
Recent economic indicators point to growth of at least 6 percent in 1997. Trends in labor supply and productivity suggest that a pace of expansion well above the EU average is sustainable over the medium term.
Executive Board Assessment
Directors were of the view that continued growth at the pace of the past few years carried risks of overheating. They encouraged the authorities to be vigilant for signs of emerging strains, with particular attention to the tightening labor and housing markets. They, therefore, welcomed the authorities' readiness to tighten macroeconomic policies as needed.
Directors pointed to the policy challenges that would be associated with Ireland's adoption of the euro. First, the prospective loss of monetary independence would add to the demands on fiscal policy. Second, further progress in structural reforms and strengthening incentives was required to bolster the economy's capacity to handle shocks. Directors noted that the current period of strong economic performance offered an ideal opportunity for actions in that regard.
Monetary policy had delivered impressively low inflation during a sustained period of rapid economic growth. Directors noted that the implementation of monetary policy in recent months had been complicated by the Irish pound's strength in the ERM and by market expectations that Irish interest rates would converge downward by the start of EMU. They agreed that, given the economy's robust growth, the central bank should not seek to hasten that convergence process, and that the recent policy tightening had been appropriate.
Directors commended Ireland's long track record of low fiscal deficits and a sharply declining debt ratio. However, Directors expressed concern about the procyclical stance of fiscal policy in the current year, owing partly to the front-loaded tax cuts in the budget. They thought it would be desirable to tighten fiscal policy, focusing on expenditure restraint particularly restraint on public sector pay. They noted that renewed slippages from announced intentions to limit the growth of current spending would reduce the scope for tax reform and weaken the credibility of fiscal policy.
Directors welcomed the adoption of a medium-term framework with the 1997 budget. However, they considered that more ambitious fiscal objectives were warranted by the cyclical position and the increasing constraints on monetary policy, the provisions of the Stability and Growth Pact, and the prospect of lower EU transfers in the medium term. Directors suggested that it would be desirable to aim, at a minimum, at fiscal balance by 1999 and to orient the 1998 budget accordingly.
Directors welcomed the further progress in narrowing the gap between the standard and 10 percent corporate tax rates, and encouraged the authorities to move to a unified rate.
Directors supported the increased emphasis on an integrated approach to strengthening work incentives in the reform of the labor market. On the tax side, priority should be given to reducing the high marginal tax rates faced by those leaving unemployment for entry level jobs. Benefit policies should ensure that work incentives were improved by raising payments to the unemployed by less than wages, and by steps to diminish the differential between child benefits for the unemployed and those at work. Directors also emphasized the importance of measures designed to prevent young school leavers from sinking into long-term unemployment. Regarding the authorities' intention to introduce a national minimum wage, it was noted that minimum wages should be set consistent with the productivity of lower-skilled labor, so as not to affect adversely the re-entry of the long-term unemployed, or the entry of less-qualified young people, into the labor market.
Directors stressed the importance of continued wage moderation embodied in the terms of the new centralized pay agreement to guard against price pressures and preserve employment prospects. They underscored that, in order to avoid possible loss of future fiscal policy flexibility, the associated tax and spending concessions should be conditional on realization of the growth assumptions underpinning the agreement.
Directors welcomed the strengthening of the Competition Authority and encouraged rigorous scrutiny of restrictive practices. They also encouraged a more active privatization policy.
Directors observed that rapid credit growth, rising asset prices, and competitive pressures in the financial sector posed challenges for supervision of credit institutions. Continued vigilance was warranted to ensure that those institutions remained adequately protected against adverse shocks.
Directors commended the authorities for the increase in official development assistance.
|Ireland: Selected Economic Indicators|
|Real Economy (change in percent)|
|Unemployment rate (in percent)||15.6||14.1||12.2||11.2||10.3|
|Gross national saving2||21.2||20.6||22.3||23.7||21|
|Gross national investment2||16.8||17.4||19.1||21.4||19.5|
|Public Finance (percent of GNP)|
|Exchequer borrowing requirement||2.4||2.1||1.8||1.2||0.9|
|General government balance3||-2.4||-1.7||-1.9||-1||-0.8|
|General government debt3||94.5||87.9||81.6||72.8||67.5|
|Money and Credit (end-year, percent change)|
|Interest Rates (year average)|
|10-year government bond yield||7.6||8||8.2||7.2||6.415|
|Balance of Payments (in percent of GNP)|
| Reserves (gold valued at SDR 35 per ounce
end of period, in billions of SDRs)
|Exchange rate regime||ERM|
|Present rate (June 30, 1997)||US$1 = Ir£0.66 28|
|Nominal effective rate (1990=100)||96.5||96.8||97.3||99.3||98.66|
|Real effective rate (1990=100)7||84.3||79.7||75.4||72.4||69.16|
Sources: Central Statistics Office; Department of Finance; and IMF, International Financial Statistics.
1Staff projections, except where noted.
2In percent of GDP.
3In percent of GDP.
5As of July 1, 1997.
7Based on relative normalized unit labor costs.
1Under Article IV of the IMF's Article of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT