IMF Executive Board Concludes 2010 Article IV Consultation with Ireland

Public Information Notice (PIN) No. 10/86
July 14, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Ireland is also available.

On July 7, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ireland.1

Background

The Irish economy is undergoing a profound adjustment to unwind the imbalances created during the boom years. Over the past decade, rapid credit growth fueled the property bubble, while increasing banks’ exposure to the property market. Economic activity became heavily dependent on the construction and financial sectors. High price and wage growth created a competitiveness gap. When, around the onset of the global financial crisis, the domestic property bubble deflated, the balance sheets of households, banks, and the government were severely damaged. Average national house prices, having fallen by 34 percent from the peak, are yet to stabilize.

Over 2008–09, output contracted by about 10 percent. Domestic consumption and investment fell sharply while exports declined less during the global downturn than did exports elsewhere. Unemployment increased from 4½ percent in 2007 to about 13 percent in March 2010. Recent indicators point to a return to economic growth during this year, but following its earlier steep fall, GDP in 2010 is projected to be about ½ percent lower than in 2009. With output below potential and high unemployment, prices declined by 1.7 percent in 2009 and staff projects a further fall of 1.8 percent in this year.

Under heavy pressure as the domestic crisis weakened asset quality and profitability and access to international wholesale funding tightened, the banking sector required extensive support from the government and European Central Bank (ECB) liquidity provision. Banks’ borrowing is supported by government guarantees, the National Asset Management Agency (NAMA) has started acquiring distressed property development and commercial real estate assets from banks at a sizeable discount, and, following stress-testing by the Financial Regulator, the government is contributing to banks’ capital enhancement.

Public finances were in balance over 2003–07, but were reliant on rapid growth and property-related revenues. As economic activity fell and bank recapitalization costs materialized, the general government deficit increased to 14¼ percent of GDP in 2009. Gross public debt increased from 25 percent of GDP in 2006 to 64 percent of GDP in 2009. The government has implemented a series of consolidation measures to help contain the deficit below 12 percent in 2010. The authorities’ multi-year plan is intended to achieve a sustainable fiscal position.

Despite the policy credibility achieved through these efforts, renewed market pressures in recent weeks point to the challenges ahead.

Executive Board Assessment

Executive Directors considered that the authorities’ decisive measures to support the banking sector and advance fiscal consolidation have helped gain policy credibility and stabilize the economy. Directors encouraged the authorities to sustain these efforts and actively manage risks going forward.

Directors noted that vulnerabilities remain elevated as evidenced by continued pressures in sovereign debt and bank funding markets. With limited fiscal resources for dealing with contingencies, maintaining a steady policy course will require effective mechanisms for oversight and transparency, and high-quality communication to minimize risks and sustain market confidence.

Directors concurred with staff’s analysis that the speed of the recovery is likely to be moderate with relatively limited growth and high unemployment. Growth prospects are weighed down by the ongoing correction of pre-crisis imbalances. The unwinding of these imbalances—arising from rapid credit growth, inflated property prices, and high wage and price levels—could limit the upside potential. In this context, Directors noted that structural reforms aimed at regaining competitiveness and boosting potential output are necessary to put the recovery on a sustainable track.

Recognizing that much progress had been made to strengthen the banking sector, Directors observed that a sizeable agenda remains. They welcomed the transfer of banks’ distressed property development and commercial real estate assets to the NAMA and the complementary decision to raise banks’ capital targets. Going forward, the orderly disposal of NAMA’s assets will help restore the commercial property market. While mindful of the moral hazard risks, Directors noted that narrowly-targeted support measures for vulnerable homeowners would limit the economic and social fallout of the crisis. Directors also welcomed the authorities’ intent to proactively reshape the banking system, noting the importance of using a strategic, but market-oriented, approach.

Directors emphasized the need to strengthen the financial stability framework. They welcomed recent institutional changes to enhance regulation and the proposed new risk-based supervisory approach. They also encouraged an early action to introduce a special bank resolution mechanism, which would further strengthen the stability framework and add to the set of tools available to meet contingencies.

Acknowledging the authorities’ significant fiscal efforts to date, Directors underscored the importance of adhering to the further consolidation targets going forward. They noted that the authorities’ ambitious targets remained appropriate, but their achievement would require continued resolve. Directors agreed that the consolidation plan would benefit from greater specificity. Many Directors also encouraged the authorities to stand ready to adopt additional measures to reach the fiscal goals and retain hard-earned credibility in the event of unfavorable developments.

Directors encouraged the authorities to move further towards a medium-term budget framework. This could help provide the structure to reduce the uncertainties associated with the consolidation process. Directors also recommended that the authorities consider adopting a fiscal rule and establish a fiscal council to advise on risks underlying public finances. Such mechanisms could help enhance policy credibility now and in the future.


Ireland: Selected Economic Indicators 1/

 
  2005 2006 2007 2008 2009
 

Real Economy (change in percent)

         

Real GDP

6.2 5.4 6.0 -3.0 -7.1

Real GNP

5.6 6.3 4.4 -2.8 -11.3

Domestic demand

8.6 6.1 4.1 -4.4 -13.9

Exports of goods and services

5.2 5.1 8.6 -1.0 -2.3

Imports of goods and services

8.4 6.5 5.6 -2.1 -9.3

HICP

2.2 2.7 2.9 3.1 -1.7

Unemployment rate (in percent)

4.4 4.4 4.5 6.1 11.8

Public Finances (percent of GDP)

         

General government balance

1.6 2.9 0.1 -7.2 -14.3

Structural balance 2/

-5.6 -6.1 -8.1 -12.0 -9.8

General government debt

27.3 24.8 24.9 44.0 64.0

Money and Credit (end-period, percent change)

         

M3 3/

19.8 30.8 9.7 -1.9 -8.7

Private sector credit 4/

28.8 25.9 17.0 7.3 -6.0

Interest rates (end-period)

         

Three-month treasury bill

2.5 3.7 4.6 3.0 0.6

10-year government bond yield

3.3 4.0 4.5 4.4 4.9

Balance of Payments (percent of GDP)

         

Trade balance (goods and services)

11.7 10.3 9.8 10.1 16.9

Current account

-3.5 -3.6 -5.3 -5.2 -2.9

Reserves (in billions of euros)

0.7 0.7 0.6 0.7 1.5

Exchange Rate

         

Exchange rate regime

Member of euro area

Euros per U.S. dollar

0.8 0.8 0.7 0.7 0.7

Nominal effective rate (1999Q1=100)

104.1 104.4 107.4 113.0 112.5

Real effective rate (1999Q1=100, CPI based)

115.4 116.0 120.1 125.6 121.9
 

Sources: Central Statistics Office; Department of Finance, Datastream and IMF International Financial Statistics.
1/ Based on data until June 18, 2010.
2/ In percent of potential GDP.
3/ The methodology used to compile M3 has been amended in line with Eurosystem requirements. Therefore, there is a break in the series.
4/ Adjusted change, which includes the effects of transactions between credit institutions and nonbank international financial companies and valuation effects arising from exchange rate movements.


1 Under Article IV of the IMF's Articles 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 Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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