IMF Executive Board Concludes Third Post-Program Monitoring Discussions with Ireland 

OREANDA-NEWS. June 24, 2015. The Executive Board of the International Monetary Fund (IMF) concluded the Third Post-Program Monitoring Discussions with Ireland,¹ and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.²

Ireland’s strong economic recovery is continuing in 2015, following robust growth of 4.8 percent in 2014. A range of high frequency indicators point to an extension of the solid recovery momentum into 2015, with growth increasingly driven by domestic demand as well as exports. Job creation continued with employment growth of 2.2 percent year-on-year in the first quarter of 2015, bringing the unemployment rate down to 9.8 percent in May. Tax revenues rose 11 percent year-on-year during the first five months of 2015, while spending remained within budget profiles, so the fiscal deficit for 2015 is expected to be 2.3 percent of GDP, outperforming the budget targets.

Owing to the ECB’s quantitative easing, financial conditions remain highly supportive despite some recent bond market volatility. House price increases have moderated in recent months following the announcement of new macro-prudential regulations, but commercial real estate prices are still rising rapidly on the back of strong demand from nonbank investors. Banks’ health has improved, but operating profitability remains weak and, despite the recent progress in the resolution of mortgages in arrears, 17.1 percent of mortgages have been in arrears for over 90 days, and of these, almost 60 percent have been in arrears for over 2 years.

Executive Board Assessment³

In concluding the Third Post-Program Monitoring Discussions with Ireland, Executive Directors endorsed the staff’s appraisal, as follows:

Ireland’s economic rebound is in full swing, yet fiscal restraint must be maintained in 2015. Growth is set to ease modestly to a still strong 4 percent in 2015 and joblessness has fallen below 10 percent. Budget outturns are off to an excellent start, with the deficit again on track to come in below target in 2015. Locking in this faster progress toward fiscal balance while growth is especially strong requires avoiding a repeat of past spending overruns.

Fiscal policy should make solid progress toward balance in the favorable economic environment and the limited fiscal space in coming years should be used to support durable growth. The authorities’ target for a deficit of 1.7 percent of GDP in 2016 would imply fiscal adjustment that is too modest given Ireland’s high public debt and strong growth. Hence it is essential that a likely outperformance of revenues be saved in order to avoid delaying adjustment to a period when growth may well be weaker. Looking further ahead, sizable adjustment challenges remain owing to demographic pressures and a rise in public investment likely needed to avoid growth bottlenecks. Measures to raise revenues should be considered to support adjustment in the face of these pressures and it is critical that any unwinding of savings in public sector wages be gradual and that efficiency gains continue. Tax reforms should be focused on areas most supportive of job creation and productivity while protecting progress in tax base broadening.

Bank health has improved yet more progress on profitability is needed and mortgage resolution efforts should be intensified. The operating profitability of banks has risen but remains low. To ensure that banks are able to sustain a credit expansion in support of recovery, lending interest rates must enable banks to cover future loan losses and also build and maintain adequate capital. Despite a welcome sizable fall in nonperforming loans in 2014, they remain very high and a rising share of mortgage arrears are becoming prolonged. It is therefore important that the Central Bank of Ireland’s shift to a bank-by-bank supervision of mortgage resolution facilitate progress in the specific areas where banks can improve their performance. But advancing restructuring in cases where that is feasible also requires steps to make legal proceedings more efficient and to increase utilization of the personal insolvency regime. Reforms recently announced by the authorities are therefore welcome, where the availability of court review—subject to suitable guidelines—should enhance borrowers’ confidence in the new insolvency arrangements. Yet an efficient repossession system is still needed where other solutions are not feasible. Close monitoring of the booming commercial property market is important, even though at this time domestic banks are not a major source of new financing.

Disposing of state shareholdings in the three domestic banks would clear the public debt incurred in supporting them. The successful sale of PTSB shares is welcome market recognition of the scale of bank repair that has been achieved in Ireland. It also signals the supportiveness of market conditions for sales of bank equity. Early steps to enhance AIB’s capital structure, subject to the approval of the ECB, would help prepare the bank for a significant divestment at a time when the authorities consider market conditions to be conducive.