Ireland: Staff Concluding Statement of the Sixth Post-Program Monitoring Mission
IMF News, December 2, 2016
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- Published: December 2, 2016
Mission overview and central assessment
- An IMF mission visited Dublin during November 29—December 2, 2016, for the sixth post-program monitoring discussions; the mission was coordinated with the European Commission and the European Central Bank.
- The Irish economy is growing at a healthy pace but remains subject to downside risks.
- The mission welcomes the authorities’ commitment to reinforce the recovery, safeguard financial stability, and restore buffers through steady fiscal adjustment.
- Despite risks, capacity to repay the Fund remains strong.
Economic outlook and key macroeconomic projections
- Robust domestic demand is projected to drive GDP growth to about 4½ percent in 2016 and just above 3 percent in 2017.
- Over the medium term, growth is projected to remain around 3 percent, broadly in line with potential.
- Inflation, which turned slightly negative this year, is expected to edge up gradually.
External and political risks
- External risks dominate for Ireland’s highly open economy, including:
- Brexit-related risks.
- A sustained low growth-low inflation environment in Europe.
- A changing political landscape in the US and Europe and rising anti-globalization sentiment.
- Ongoing developments in corporate tax treatment at the international level.
- Agreement on the 2017 budget is an important milestone for the new minority government within a challenging political context.
Measurement challenges for domestic activity
- Operations by multinationals, including contract manufacturing and aircraft leasing, complicate assessment of domestic activity based on headline GDP.
- The mission welcomes ongoing work, with IMF and other external support, on alternative measures for domestic activity; preliminary results are expected shortly.
Fiscal stance, targets, and recommendations
- The government’s fiscal targets are broadly appropriate given Ireland’s strong track record of fiscal discipline.
- The planned moderate fiscal adjustment in 2017 is viewed as a reasonable balance between deficit reduction and addressing public expectations for a growth dividend.
- Key specific targets and commitments:
- 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.
- Fiscal policy recommendations and cautions:
- Maintain steady progress in rebuilding fiscal buffers given still elevated public debt.
- Risks to the outlook and to the revenue base, including from the concentrated corporate tax base, call for:
- Maintaining moderate growth in expenditures.
- Saving any revenue windfalls.
- Ensuring potentially temporary revenue gains are not used to fund permanent expenditure increases.
- Within a tight envelope, fiscal policy could be more supportive of growth by improving spending efficiency to support priority social and infrastructure needs.
- With capital expenditure already well below peers, well-targeted increases are needed to buttress competitiveness and welfare through investments in economic and social infrastructure.
- Any expenditure increases beyond those already programmed would need to be offset by tax increases or cuts in other spending to meet the deficit target, requiring difficult trade-offs.
- Fiscal incentives in the Housing Action Plan should be limited and closely monitored to ensure they target those most in need and 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.
- Consideration should be given to a more comprehensive reform of personal income tax to reduce the tax burden on middle-income households.
- Scaling up the property tax and/or reducing VAT exemptions could help mitigate the costs of these reforms.
Banking sector health and non-performing loans
- Underlying profitability of domestic banks has increased and capital and liquidity positions have improved.
- Recent stress tests by the IMF and EBA indicate Irish banks remain vulnerable to shocks.
- The UK’s decision to leave the EU could further pressure domestic banks’ profitability given direct and indirect exposure to the UK market.
- On loan pricing and legislative proposals:
- In the context of a legislative proposal under discussion in the Parliament on variable mortgage interest rates, the mission stressed that loan pricing should adequately reflect market conditions to allow banks to build up capital and return to normal business profitability.
- This would enhance investor confidence and ultimately promote increased competition in the Irish banking system.
- Disposal of the government’s stakes in Irish banks, which would support public debt reduction, should continue once market conditions are supportive.
Mortgage arrears resolution and legal framework
- Non-performing loans are declining overall, but resolution of deep mortgage arrears remains sluggish.
- Recommendations to accelerate arrears resolution:
- Intensified supervisory oversight of banks’ internal management of NPL resolution should continue to ensure prolonged mortgage arrears are tackled through loan restructuring where feasible.
- The “advice and arrears” scheme recently introduced by the government shows promise in improving borrower-creditor engagement on mortgage arrears.
- Further steps to make legal proceedings more efficient are critical to accelerate the resolution process.
Macro-financial stability and housing market risks
- Continued vigilance is needed to safeguard macro-financial stability, especially relating to the property market.
- Macro-prudential measures introduced in 2015 play an important role in strengthening resilience of banks and households to adverse shocks.
- The mission welcomes the central bank’s first comprehensive review of these measures and concurs with its broad conclusions.
- The announced recalibration of parameters is reasonable given early experience with the framework and current housing market dynamics.
- Key implementation priorities:
- Steadfast progress toward full implementation of the Central Credit Register.
- Replacing the loan-to-income limit with a debt-to-income limit, which better captures borrowers’ repayment capacity, remains key to ensure prudent lending.
Ireland: Staff Concluding Statement of the Sixth Post-Program Monitoring Mission (December 2, 2016), IMF Communications Department