Mission Concluding Statement 

Ireland: Staff Concluding Statement of the Fourth Post-Program Monitoring Mission

November 13, 2015

An International Monetary Fund (IMF) mission visited Dublin from November 9 to November 13 for the fourth Post-Program Monitoring discussion—part of the IMF’s regular surveillance of countries with IMF credit outstanding above 200 percent of quota. The visit was coordinated with the European Commission's third Post-Programme Surveillance discussion. At the end of the visit, IMF Mission Chief Zuzana Murgasova thanked the Irish authorities for candid and constructive discussions, and issued the following statement:

Ireland’s growth continues to outperform expectations, yet needs to be sustained for the benefits to reach everyone. Debts remain high, and future shocks are inevitable, lending importance to the unfinished task of rebuilding economic resilience. While it is appropriate to use some of the fruits of the recovery to address problems built up during the difficult years, it is critical that fiscal discipline be maintained. Aiming for structural fiscal balance within three years is about right, but fiscal measures should be more supportive of growth potential. Banking and housing policies are suitably focused on fixing the remaining damage from the last crisis and avoiding another cycle of boom-bust.

1. Ireland is enjoying the fastest growth rate in the EU, but is not yet out of the woods. Real GDP is set to grow by a remarkable 6 percent in 2015. Investment continues to be the main driver, supported by private consumption on foot of growing employment and wages. Strong U.K. and U.S. demand coupled with euro depreciation are boosting exports. Yet with rising risks to the global outlook and still elevated vulnerabilities, including from high public and private debt burdens, it is vital to increase room for policy maneuver.

2. Strong growth will allow fiscal outturns in 2015 to outperform targets despite an easing of the underlying stance. Revenues have surged, led by corporation tax, more than offsetting expenditure overruns and discretionary spending increases. The deficit is expected to shrink to about 2 percent of GDP, bringing gross public debt to 98 percent of GDP this year. However, IMF staff estimate that the structural balance before interest payments will deteriorate modestly in 2015.

3. Budget 2016 plans a resumption in the improvement of the underlying fiscal stance. The deficit is targeted to decline to about 1 percent of GDP next year, with IMF staff estimating a slightly improved structural balance before interest payments. With the public debt to GDP ratio around four times its pre-crisis level, any revenue receipts in excess of budget projections should be saved rather than used to finance further tax cuts. Beyond 2016, the deficit is projected to continue to narrow, reaching structural balance by 2018 on IMF staff estimates. Maintaining structural balance thereafter would be the minimum required to ensure a prudent pace of debt reduction.

4. The measures in Budget 2016 rightly share the fruits of recovery, yet could have been more growth friendly. The revenue initiatives, aimed at increasing labor participation, and additional social expenditures could be better targeted and more protective of budget resources. The resulting savings would create more scope for capital spending and outlays related to demographic pressures. At the same time, maintaining timely property revaluations for revenue purposes would cement sustainability of the revenue base.

5. Structural measures in the housing market seek to jump start construction. Financial weakness of builders, tight lending standards, and high development costs including from onerous building codes have left construction subdued. The resulting housing shortage has fueled prices and rents and stretched affordability, prompting policy responses. A streamlining of building codes, along with the launching of rebates for qualifying projects and other steps, aims to boost supply. Some of the gains, however, may be offset by new administrative measures to stabilize rents which, by reducing rates of return on investment properties, could dissuade construction.

6. Economic recovery has supported ongoing bank repair, where more remains to be done. Resolving impaired loans will reduce fragilities, while achieving durable profitability is key to supporting future credit growth. Banks’ business models need to balance profit and risk management objectives. Continued supervisory efforts are needed to push forward resolution of mortgages in prolonged arrears, where a more effective legal process would improve incentives for engagement. Provision releases should be based on conservative assumptions and collateral reappraisals, and should reflect difficulties in realizing collateral as well as realistic assessments of borrowers’ capacity to repay.

7. The authorities are appropriately focused on ensuring prudent lending standards. For mortgages, macroprudential rules in place since February 2015 seek to support the resilience of households and banks, with evidence suggesting they have curbed house price expectations. For commercial real estate financing, where nonbanks play an important role, close monitoring is ongoing to identify vulnerabilities, including potential spillovers to the banking system.

8. Disposals of public stakes in the banks would accelerate sovereign debt reduction. Ireland spent some 40 percent of GDP of state resources supporting the banks, part of which has already been recovered. Significant additional amounts can be recouped going forward. The recently approved capital actions at Allied Irish Banks, when implemented, will enhance capital quality and position the bank for divestment. Official shareholdings in the Bank of Ireland and Permanent tsb will also generate recoveries for the taxpayer over time.