IMF Executive Board Concludes 2017 Article IV Consultation with Ireland
June 26, 2017
On June 23, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Ireland.
Ireland continues to be among the euro area’s top growth performers. Real GDP expanded by 5.2 percent in 2016, supported by a healthy expansion of private consumption and buoyant investment, including construction. Strong broad-based job creation brought unemployment down to 6.4 percent in May, its lowest level in a decade, while inflation remained low as the recent pickup in energy prices and upward pressure from services were partly offset by the impact of the Sterling weakness. Higher-than-projected revenues, particularly corporate income tax receipts, supported a decline in the 2016 fiscal deficit to 0.6 percent of GDP, below the target of 0.9 percent of GDP, thus contributing to a further moderation of public debt.
Banks have strengthened their balance sheet further and remain profitable. While still high, non-performing loans have declined. Large redemptions continue to drive overall credit down, albeit at a slowing pace, as new lending has picked up in both corporate and household segments. Improved labor market conditions, rising incomes, and recent policy measures have contributed to increased pressures on house prices and rents in the face of a lagged supply response following the deep property-driven crisis.
The outlook remains positive, but with substantial, mainly externally-driven downside risks. Real GDP is projected to grow at 3.9 percent in 2017, propelled by strong domestic demand. Over the medium-term, growth is projected to decelerate and converge towards its potential of about 3 percent, narrowing the positive output gap gradually, and inflation is set to stabilize at just below 2 percent. Public finances are projected to improve further, allowing the government to attain its Medium-Term Objective of a structural deficit of ½ percent of GDP next year, while healthy export growth will keep the current account surplus broadly unchanged.
Executive Board Assessment [2]
Executive Directors commended Ireland’s strong economic performance, including broad-based job creation and continued balance sheet repair. The medium-term outlook also remains favorable. However, lingering crisis legacies, rising housing market pressures, and externally-driven uncertainties, mainly from Brexit, pose challenges. Against this background, Directors recommended that policies should focus on rebuilding fiscal buffers, strengthening economic resilience, guarding against a re-emergence of boom-bust dynamics, and fostering sustainable, inclusive growth.
Directors recommended growth-friendly fiscal consolidation to further reduce the public debt-to-GDP ratio, enhance resilience to shocks and build buffers. In this context, they emphasized the need to broaden the tax base and save temporary revenue windfalls, including from volatile corporate taxes. Given continued spending pressures, Directors called for maintaining sufficient room for social expenditures and growth-enhancing capital spending within the envisaged deficit-reduction strategy. They welcomed Fund technical assistance for public investment management assessment and ongoing expenditure reviews to enhance capital planning and expenditure prioritization.
Directors noted that banking system recovery is progressing. While the outlook is positive, Brexit-related uncertainties, international regulatory changes, and elevated NPL levels pose challenges. Directors stressed the importance of the macro-prudential framework, given the recent pick up in lending. In addition, they underlined the need to accelerate arrears resolution, including through intensified supervisory oversight, support greater creditor-borrower engagement, and improve the efficiency of legal proceedings.
Directors stressed that the strong momentum in the housing market requires close monitoring and noted that persistent pressures may lead to imbalances. They welcomed efforts to expand housing supply and assist the homeless. Directors noted that additional measures to reduce building costs, free up land for development, and accelerate loan restructuring for distressed, but viable, firms in the construction sector would help unlock housing supply. Measures to improve housing affordability should be well-targeted.
Directors noted that measures to strengthen human capital and reinforce competitiveness, particularly for domestic enterprises, are key to supporting sustained growth 2 and reducing income and regional disparities. They called for continued efforts to upgrade labor force skills and raise female labor force participation. Directors also emphasized the need to enhance competitiveness through greater support for SME innovation and improved infrastructure.
While Ireland’s economic statistics conform to international norms, Directors underscored the need for indicators of underlying economic activity which suitably account for the operations of foreign-owned multinationals to allow a more accurate assessment of economic developments and policymaking. Directors welcomed the authorities’ plans to publish the new indicators.
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Ireland: Selected Economic Indicators, 2015–22 |
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[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.
[2] 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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