IMF Executive Board Concludes 2012 Article IV Consultation with Ireland

Public Information Notice (PIN) No. 12/105
September 10, 2012

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 2012 Article IV Consultation with Ireland is also available.

On September 5, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ireland.1

Background

Since the last Article IV consultation in mid-2010, the Irish government has faced a loss of access to market financing resulting in a need to draw on financial support from the EU-IMF from late 2010. This development was the culmination of an exceptionally deep banking crisis associated with the bursting of a commercial and residential property bubble. The economic impact was severe, with real GDP contracting 8 percent during 2008-10, the CPI deflating by 5½ percent, unemployment jumping sharply to recently approach 15 percent, and house prices falling to half of their peak levels. Slumping revenues resulted in the fiscal deficit widening to over 10 percent of GDP in 2009-10, and large loan losses in the banking system required public support of some 40 percent of GDP, contributing substantially to the dramatic rise in public debt from 25 percent of GDP in 2007 to about 118 percent in 2012.

The Irish authorities’ key policy goals are to repair the banking system so that it is able to support economic recovery, put the public finances on a sound footing, and to foster domestic activity and job creation by implementing structural reforms. The authorities have decisively implemented their strategy to reorganize, recapitalize, and downsize the banking system, succeeding in restoring strong capital ratios and stabilizing deposits. Nonetheless, nonperforming loans have risen to high levels and bank profitability and lending is weak. In particular, the share of the principal of owner occupied residential mortgage loans in arrears has risen to almost 15 percent, reflecting the household debt burdens of some 210 percent of disposable income and high unemployment.

Fiscal consolidation was well underway before the EU-IMF support program, with cumulative budget measures during 2009-12 reducing the structural primary deficit by some 8 percent of GDP. In 2012, the budget is on track to reach the 8.6 percent of GDP deficit target. The authorities are committed to the medium-term goal of reducing the deficit to below 3 percent of GDP by 2015, and the Medium-term Fiscal Statement of November 2011 indicates that this will entail a 5 percent of GDP consolidation during 2013-15.

Aided by a significant unwinding of competitiveness losses during the boom, Ireland returned to export-led growth of 1.4 percent in 2011. Yet, domestic demand continued to decline as domestic and external uncertainties hinder investment, households seek to reduce debt burdens, and fiscal adjustment continues. A weakening in trading partner growth is expected to slow Ireland’s growth to about 0.4 percent in 2012, and growth projections for 2013 have eased to about 1.4 percent owing to a slower rebound in exports and recovery in domestic demand.

Executive Board Assessment

Executive Directors commended the authorities for their strong ownership and steadfast implementation of the program, particularly financial sector reform and fiscal consolidation. The economy has resumed modest growth, but downside risks remain high, and substantial and difficult further policy efforts are needed to promote a sustained economic recovery.

Against this backdrop, Directors welcomed the authorities’ determination to put the public finances on a sound footing, repair the banking system so that it can support economic recovery, and implement structural reforms to boost domestic activity and job creation. They agreed that the prospects for the success of Ireland’s strong policy implementation hinge on recovery across the region and continued progress at the European level to ensure the stability of the euro area. Directors welcomed the June 29 statement by euro area leaders to further improve the sustainability of Ireland’s well-performing program, which has been instrumental in the country’s recent successful return to the sovereign bond market. They looked forward to a timely agreement on concrete steps that would break the vicious circle between banks and the sovereign.

Directors commended the determined actions taken by the authorities to restructure, downsize, and recapitalize banks. To restore banks’ ability to provide sound credit and help revive domestic demand, they emphasized the need to arrest the deterioration in bank asset quality and regain bank profitability. Directors supported continued supervisory engagement to promote banks’ implementation of durable solutions for households’ mortgage arrears and advancing a similar approach for loans to SMEs. They considered that reforms of the personal insolvency framework would help address debt distress while preserving debt service discipline, and that the repossession framework should complement these reforms. Noting euro area steps toward enabling the ESM to recapitalize banks directly, along with the creation of a single supervisory mechanism, Directors concurred that temporary ESM ownership of Irish banks could reduce funding costs, boosting their profitability and ability to support economic recovery.

Directors commended the substantial fiscal consolidation already implemented, but stressed that significant efforts are still needed to bring the deficit below 3 percent of GDP by 2015. They called for high quality expenditure and revenue measures that would be growth friendly, durable and equitable. Directors concurred that better targeting of spending, including on state pensions, could deliver more immediate savings while protecting the most vulnerable. In addition, they supported deeper reforms of key government services to produce medium-term savings, especially health and education services, and highlighted that the public service agreement should facilitate these reforms. Nonetheless, further reductions in public sector wages might also be needed if wage bill targets cannot be met while protecting public services. On the revenue front, Directors saw merit in broadening the tax base, including by introducing a value-based property tax.

Directors agreed that reducing the high level of unemployment remains critical, and supported the infrastructure stimulus package. They particularly saw a need to contain structural unemployment and encouraged reallocating resources to services to help job seekers regain work together with reforms to the structure of social benefits. Facilitating mobility across sectors will need effective education and training policies and regular monitoring of outcomes, and will be aided by recent legislative reforms of sectoral wage setting.


Ireland: Selected Economic Indicators, 2008–13
(Annual percentage change unless indicated otherwise)
 
             
  2008 2009 2010 2011 2012 2013
          Proj
 

National accounts (constant prices)

           

Real GDP

-2.1 -5.5 -0.8 1.4 0.4 1.4

Domestic demand

-3.7 -11.0 -4.3 -3.7 -2.3 -0.5

Private consumption

-0.1 -5.4 1.0 -2.4 -1.9 -0.2

Public consumption

0.6 -4.4 -6.5 -4.3 -2.5 -2.0

Gross fixed investment

-10.0 -27.6 -22.6 -12.6 -4.0 0.0

Net exports 1/

1.4 4.5 3.0 5.4 2.1 1.8

Exports of goods and services

-1.1 -3.8 6.2 5.1 2.8 3.5

Imports of goods and services

-3.0 -9.7 3.6 -0.3 1.0 2.4

Real GNP

-1.8 -8.1 0.9 -2.5 -0.6 0.7

Gross national saving (in percent of GDP)

16.1 12.6 12.8 11.4 11.6 12.3

Private

18.9 20.8 21.3 19.8 19.5 19.7

Public

-2.8 -8.2 -8.6 -8.4 -7.9 -7.4

Gross investment (in percent of GDP)

21.8 15.0 11.6 10.3 9.8 9.6

Private

16.4 10.9 7.9 7.6 7.8 7.7

Public

5.4 4.0 3.7 2.7 1.9 1.9

Prices, wages and employment (annual average)

           

Harmonized index of consumer prices

3.1 -1.7 -1.6 1.1 1.4 1.0

Average wage, whole economy

3.5 -0.1 -2.2 -0.7 0.3 0.8

Employment

-1.1 -8.1 -4.2 -2.1 -0.8 0.4

Unemployment rate (in percent)

6.3 11.8 13.6 14.4 14.8 14.4

Money and credit (end-period) 2/

           

Irish resident private sector credit 3/

8.8 -1.7 -3.7 -2.9 -3.3 ...

Financial and asset markets (end-period) 2/

           

Three-month interbank rate

2.9 0.7 1.0 1.4 0.7 ...

Government bond yield (in percent, 10-year) 4/

4.4 4.9 9.2 8.5 6.2 ...

Annual change in ISEQ index (in percent)

-33.8 -23.4 13.2 3.0 7.3 ...

House prices

-5.9 -18.3 -13.1 -13.2 -14.4 ...

Public finance (in percent of GDP)

           

General government balance 5/

-7.3 -13.9 -30.9 -12.8 -8.3 -7.5

General government balance (excl. bank support)

-7.3 -11.5 -11.2 -9.1 -8.3 -7.5

Primary balance (excl. bank support)

-6.0 -9.4 -8.1 -5.9 -4.3 -2.1

General government gross debt

44.5 64.9 92.2 106.5 117.7 119.3

General government net debt

24.6 42.0 74.7 94.9 103.0 107.6

Balance of goods and services

9.0 15.9 18.6 21.9 24.1 25.7

Balance of income and current transfers

-14.7 -18.2 -17.5 -20.8 -22.3 -23.0

Current account

-5.7 -2.3 1.1 1.1 1.8 2.7

Nominal

111.6 112.5 107.8 108.6 105.5 ...

Real (CPI based)

123.1 121.0 111.6 110.2 107.1 ...

Memorandum items:

           

Population (in millions) 6/

4.4 4.5 4.5 4.6 4.6 4.5

GDP per capita (in euros)

40,452 36,166 35,003 34,705 35,367 36,641

GDP (in billions of euros)

178.9 161.3 156.5 159.0 161.7 165.9
 

 Sources: Bloomberg; Central Bank of Ireland; Department of Finance; International Financial Statistics; and IMF staff estimates.

1/ Contribution to growth.

2/ 2012 column refers to the latest available information: end-March for resident private sector credit, end-April for the competitiveness indicators, end-May for the three-month interbank rate, and end-June for other indicators.

3/ Adjusted growth rate of credit to households and non-financial corporations.

4/ For 2011, 9 year government bond yield is shown as no 10 year benchmark exists.

5/ General government balance per ESA95 definition.

6/ 2011 figure revised following prelimary results from the 2011 Census, 2007–10 to be revised when available.


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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