The Executive Board of the International Monetary Fund (IMF) today completed the eighth review of Ireland’s performance under an economic program supported by a three-year, SDR 19.4658 billion (about €22.79 billion or about US$29.99 billion) arrangement under the Extended Fund Facility (EFF), or the equivalent of about 1,548 percent of Ireland’s IMF quota. The completion of the review enables the disbursement of an amount equivalent to SDR 0.758 billion (about €0.89 billion or about US$1.17 billion), bringing total disbursements under the EFF to SDR 16.5434 billion (about €19.37 billion or about US$25.49 billion).
The arrangement for Ireland, which was approved on December 16, 2010 (see Press Release No. 10/496), is part of a financing package amounting to €85 billion (about US$111.9 billion), also supported by the European Financial Stabilization Mechanism and European Financial Stability Facility, bilateral loans from Denmark, Sweden, and the United Kingdom, and Ireland’s own contributions.
Ireland’s steadfast policy implementation has continued even as growth has slowed in 2012. The 2012 outturn should be comfortably within the 8.6 percent deficit target despite health overruns and higher social welfare spending owing to high unemployment. The budget for 2013 was recently submitted to parliament, setting out a combination of durable spending and revenue measures of over 2 percent of GDP to reduce the deficit to 7.5 percent of GDP.
The Irish authorities are also advancing reforms to help revive growth. In the financial sector, they are supervising banks’ efforts to reduce loans in arrears and are adopting insolvency reforms for highly indebted households and SMEs. To rebuild bank profitability they are preparing for the possibility of phasing out the guarantee scheme and are monitoring reductions in banks’ operational costs. To avoid high unemployment becoming more structural, the authorities are intensifying engagement with unemployed persons, reforming further education, and revamping housing supports.
Market conditions for Irish sovereign debt are much improved following the June 29, 2012 announcement that the Eurogroup is examining the situation of the Irish financial sector with a view to further improving the sustainability of Ireland’s well-performing program, and also of Outright Monetary Transactions by the ECB. Together with Ireland’s strong policy implementation, these developments have enabled Irish sovereign yields to decline notably in 2012 and allowed Ireland to access significant market funding in the second half of the year.
Looking ahead, however, a more gradual economic recovery is projected, with growth of 1.1 percent in 2013 and 2.2 percent in 2014, with public debt expected to peak at 122 percent of GDP in 2013. This baseline outlook is subject to significant risks from any further weakening of growth in Ireland’s trading partners, while the gradual revival of domestic demand could be impeded by high private debts, drag from fiscal consolidation, and banks still limited ability to lend. If growth were to remain low in coming years, public debt could continue to rise, in part reflecting the potential for renewed bank capital needs to emerge.
Following the Executive Board’s discussion, Mr. David Lipton, First Deputy Managing Director and Acting Chair, said:
“The program with Ireland has now been in place for two years and the Irish authorities have consistently maintained strong policy implementation. All program targets have been met and a range of fiscal, financial, and structural reforms are in train. Aided by the commitments of European partners, Irish bond yields have declined, allowing Ireland to begin its return to market financing.
“The authorities have demonstrated their commitment to put Ireland’s fiscal position on a sound footing, with the 2012 deficit target expected to be met even through growth has been low. The Medium-Term Fiscal Statement set out a phased path for considerable further fiscal consolidation to bring the budget deficit below 3 percent by 2015. The 2013 budget provides a key step along that path, and full implementation is needed. Nonetheless, if next year’s growth were to disappoint, any additional fiscal consolidation should be deferred to 2015 to protect the recovery.
“Vigorous implementation of financial sector reforms is needed to revive sound bank lending in support of economic growth. Key steps forward include arresting the deterioration of banks’ asset quality, reducing their operating costs, and lowering funding costs through orderly withdrawal of guarantees. The personal insolvency reform being adopted should facilitate out-of-court resolution of household debt distress, especially if complemented by a well functioning repossession process to help maintain debt service discipline and underpin banks’ willingness to lend.
“Continued strong Irish policy implementation is essential for the program’s success. Ireland’s market access would also be greatly enhanced by forceful delivery of European pledges to improve program sustainability, especially by breaking the vicious circle between the Irish sovereign and the banks. By supporting medium term growth and debt reduction prospects, this would help avoid prolonged reliance on official financing.”