17 December 2012

IMF completes eighth review under the extended fund facility with Ireland and approves €0.89 billion disbursement

Ireland’s steadfast policy implementation has continued even as growth has slowed in 2012. The 2012 outturn should be comfortably within the 8.6 per cent 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 per cent of GDP to reduce the deficit to 7.5 per cent 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.

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 programme, and also of Outright Monetary Transactions by the ECB.

Looking ahead, however, a more gradual economic recovery is projected, with growth of 1.1 per cent in 2013 and 2.2 per cent in 2014, with public debt expected to peak at 122 per cent 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.

David Lipton, First Deputy Managing Director and Acting Chair, said: “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 programme’s success. Ireland’s market access would also be greatly enhanced by forceful delivery of European pledges to improve programme 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.”

Press release

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