05 September 2012

IMF completes seventh review under the extended arrangement with Ireland and approves €0.92 billion disbursement

Despite considerable headwinds from an adverse global economic outlook and the on-going euro area crisis, the Irish authorities have pressed forward with implementing their economic programme. All end-June 2012 performance criteria and indicative targets for the seventh review were met, and two structural benchmarks were observed, including a benchmark for end-September on the introduction of a fiscal responsibility bill to parliament.

The 2012 budget remains on track for the fiscal deficit target of 8.6 per cent of GDP, despite a slowing in real GDP growth from 1.4 per cent y/y in 2011 to a projected ½ per cent in 2012 owing to weaker trading partner growth. In the year through July, the exchequer primary deficit was 0.7 per cent of GDP below that in the corresponding period of 2011. Income tax, VAT and corporation tax collections were ahead of expectations, yet this over-performance was partly offset by higher health spending and unemployment benefits. The authorities have announced corrective measures for health spending.

Financial sector reforms have continued to advance, with the authorities submitting a restructuring plan for Permanent TSB to the European Commission, and they are preparing a roadmap to wean banks off the costly Eligible Liabilities Guarantee (ELG) scheme while preserving financial stability. The authorities introduced a personal insolvency bill to parliament at end June, and, at the Central Bank’s request, banks are preparing to roll out a set of loan modification options to address rising mortgage arrears.

Following the Executive Board’s discussion, Mr David Lipton, First Deputy Managing Director and Acting Chair, said: “Half way through Ireland’s extended arrangement, the Irish authorities maintain strong ownership and implementation of their adjustment programme. All programme targets for end June have been met. Benefiting from the strengthened European support signalled at the euro area summit at end June, Irish bond yields have declined significantly in recent months, and the country regained access to sovereign bond markets in July. Nonetheless, the economic recovery is tentative and unemployment unacceptably high. Putting the financial sector into a position to support the recovery will require continuing efforts to return banks to profitability. Lowering funding costs by weaning banks off the costly Eligible Liability Guarantee scheme in an orderly manner is essential, as is reducing operational costs. The implementation of strategies to deal with mortgage arrears needs to continue to move ahead, so the CBI’s plans to monitor banks’ progress are welcome, and similar frameworks are needed for distressed credit to SMEs. To support these efforts, key issues for the effective operation of the new personal insolvency framework should be addressed in a timely manner.“

“Sound budget management has continued in 2012 and the authorities should ensure the effectiveness of measures to contain health expenditure overruns. Yet significant further consolidation is necessary, so the fiscal responsibility bill and other enhancements of the budgetary framework are welcome. The 2013 budget should focus on high quality measures that are durable and equitable, and also provide greater clarity on measures to be adopted in later years.“

Press release

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