IMF/Ireland: First post-programme monitoring discussions
18 June 2014
The Irish economy is in the early stages of recovering from an exceptionally severe banking crisis. Following a smooth exit from the EU-IMF supported programme, strong job creation and other indicators suggest Ireland’s economic recovery is broadening.
Together with other European periphery countries, Ireland currently enjoys favourable financial market conditions. Nonetheless, important challenges remain, with unemployment still high, credit continuing to contract, and significant public and private balance sheet fragilities. Policies to help sustain the recovery and progressively reduce vulnerabilities were therefore the focus of discussions:
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Steady progress on fiscal consolidation is needed to put high public debt on a firmly downward path. For 2014, the authorities should continue to contain total spending within ceilings, including if revenues outperform. Fiscal measures of about 1¼ percent of GDP in 2015 would safeguard hard won credibility and also allow automatic stabilisers to operate symmetrically, cushioning growth shocks. Budget balance is an appropriate medium-term goal and is needed to put the high public debt burden on a firmly declining path thereby reducing risks to recovery.
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Rebuilding banks’ lending capacity, especially by resolving high nonperforming loans (NPLs), is needed to support sustained domestic demand revival. Resolution of mortgage distress remains an outstanding challenge that requires continued intensive effort and workouts or disposals of impaired commercial real estate (CRE) loans should be energised. The ECB’s Comprehensive Assessment is important to reinforce confidence in European banks, including in Ireland, and any capital shortfalls would need to be addressed in a timely manner, where common euro area resources should provide a backstop.
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Employment and investment should be facilitated while limiting fiscal risks. Further improving engagement with the long-term unemployed and ensuring training meets employer needs is essential. The new Ireland Strategic Investment Fund (ISIF) aims to support growth through commercial investments, including in SMEs and infrastructure, yet entails major operational challenges. Commerciality should be ensured through close scrutiny of project returns and substantial private investor participation, and the need for ISIF should be reviewed periodically.
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