18 July 2012

Ireland – Concluding statement of the IMF

The report concluded that difficult challenges remain in the context of persistent euro area uncertainties, and a further strengthening of European support to Ireland is required to weaken bank-sovereign linkages and improve the sustainability of the well-performing adjustment programme.

The Irish authorities have made impressive progress to restore stability in the face of an exceptionally deep banking crisis. Determined actions have been taken to restructure and downsize banks, and the recapitalisation exercise in early 2011was rigorous and transparent. Budgetary efforts have been substantial in recent years, containing the fiscal damage from the severe economic collapse in 2008-10 while maintaining social cohesion. These and other steps have together helped rebuild confidence, as seen in declining spreads on Irish bonds, the recent successful return to the Treasury bill market, and continuing substantial inflows of foreign direct investment.

Success will hinge on euro area stability and recovery, and strengthened European support is also required. Ireland’s small open economy has regained much of the competitiveness lost during the boom. Yet prospects for recovery, and for the resumption of market financing for the sovereign, rely on a revival of trading partner growth and calmer euro area financial conditions. Against that backdrop, euro area leaders have recently made welcome commitments to break the vicious circle between banks and sovereigns by enabling the ESM to recapitalise banks directly, to treat similar cases equally, and to examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. These commitments represent key stepping stones towards the mutually beneficial goals of ensuring Ireland’s economic recovery and its durable return to the bond market, thereby avoiding continuing dependence on official financing.

Ireland has implemented substantial fiscal consolidation since the onset of the crisis. Cumulative budget measures during 2009-12 strengthened the structural primary balance by just over 8 per cent of GDP. This effort has been expenditure-led, including cuts in public wages, social welfare rates, personnel numbers and capital spending. Revenue contributions have included income tax base broadening, higher taxes on capital and savings, and an increase in the standard VAT rate. Careful design has enabled this consolidation to be achieved during a deep economic slump without compromising social cohesion or key public services.

Full report

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