Ireland: 2010 Article IV Consultation: Staff Report; and Public Information Notice on the Executive Board Discussion

International Monetary Fund

doi:10.5089/9781455207640.002.A001

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Ireland

2010 Article IV Consultation: Staff Report; and Public Information Notice on the Executive Board Discussion

Author: International Monetary Fund

Publication Date:: 13 Jul 2010

eISBN:: 9781455207640

Language:: English

Keywords:: ISCR; CR; GDP; liquidity provision; deficit; holding; property bubble; real GDP; financial market; unemployment rate; banking sector; government bond; foreign currency

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Irish policymakers have gained significant credibility, through assertive steps, to deal with the most potent sources of vulnerability. A continuation of vigorous policy efforts is required with an emphasis on risk management. Much progress has been made on the financial stability agenda, but a special bank resolution scheme is required. The government has stayed on course, toward their consolidation goals. A medium-term fiscal framework incorporating expenditure ceilings is a valuable management tool that will help create greater transparency of fiscal priorities and reduce fiscal volatility.

Abstract

I. Retaining Credibility¹

1. Through assertive steps to deal with the most potent sources of vulnerability, Irish policymakers have gained significant credibility. Measures to stabilize the banking sector and achieve substantial fiscal consolidation have demonstrated the authorities’ resolve to alleviate short-term risks while beginning to tackle their considerable long-term challenges. These actions have reassured the global policy community and international financial markets. The precipitous fall in Irish banks’ stock prices has abated. Over the past months, Irish sovereign bond spreads have tended to rise significantly on the days of intensely adverse international market sentiment but otherwise Ireland has been accorded the space to pursue its planned policy trajectory.

2. However, the path from crisis to stability and recovery is a narrow one. With some reversal in the earlier loss of competitiveness and improvements in the global economy, exports will lead the recovery. But spillovers to the domestic economy will be limited because of exports’ heavy reliance on imports, their tendency to employ capital-intensive processes, and the sizeable repatriation of profits generated by multinational exporters. Moreover, the unwinding of home-grown imbalances from the boom years—arising from rapid credit growth, inflated property prices, and high wage and price levels—will create deflationary tendencies that act as a drag on growth. Banks remain a source of downside risks from higher than expected losses, uncertainties in global regulatory trends, and continued financial market tensions that restrict access to funding.

3. Along the long-haul path to normalcy, retaining policy credibility will require demonstrated commitment and active risk management. The appropriately ambitious fiscal consolidation plan demands years of tight budgetary control. Likewise, the weaning of the banking sector from public support and its eventual return to good health will proceed at only a measured pace. In the interim, unforeseen fiscal demands may occur. In this context, at times heavily bunched banks’ funding needs and episodes of market volatility could generate unwelcome pressures and disruption. With limited fiscal resources for dealing with contingencies, maintaining a steady policy course will require mechanisms for oversight and transparency, and high-quality communication to minimize risks and sustain the political consensus and market confidence.

II. The Near-Term Growth and Employment Outlook

A. Output

4. Economic contraction continued through 2009. Following a precipitous fall in 2008:Q4, the pace of decline moderated. The economy appeared to stabilize in 2009:Q3, but a q-o-q contraction of 2.3 percent in the final quarter reflected continued underlying weaknesses. For the year, Irish GDP fell by 7.1 percent, reflecting a decline in domestic consumption and investment, particularly construction. Exports declined, but the import contraction was larger, so net exports contributed positively. GNP—income to nationals—fell by 11.3 percent, more steeply than did GDP since the foreign multinationals held up better than the domestic sector.

5. The extended weakness reflects not just cyclical contraction but structural changes that are reversing past excesses. Pre-crisis growth depended heavily on the construction and financial sectors, which increased their share of GDP to more than 15 percent. In a reinforcing process, housing and commercial development relied on rapid credit growth, leading to overvalued properties and an unsustainable private credit-to-GDP ratio. In the contraction, that process worked in reverse: increased unemployment and loss of consumer confidence contributed to further weakening of property prices and the banking sector.

6. The economy is projected to resume growth in 2010. Short-term indicators present a mixed picture of prospects. After a sharp rise in January, industrial production has pulled back. Goods exports are recovering from a weak performance in the second half of 2009. Sentiment measures have also shown improvement, but they incorrectly predicted a much stronger 2009:Q4 and do not as yet reflect the recent financial market tensions. Recent unemployment data were disappointing. Consequently, likely outcomes are in a larger than usual zone of uncertainty. Even as the economy recovers through the year, staff projects the GDP for 2010 to be ½ percent lower than in 2009, but with a q4-on-q4 increase of about 2 percent. The authorities have not recently updated their official projections but see scope for a larger cyclical rebound in 2010–11.

Ireland - Real GDP growth projections 2010–12

Source	Date	2010	2011	2012
IMF	June 2010	-0.6	2.3	2.5
Department of Finance	Dec. 2009	-1.3	3.3	4.5
Central Bank	April 2010	-0.5	2.8	..
Economic and Social Research Institute	April 2010	-0.5	2.3	..
OECD	May 2010	-0.7	3.0	..
European Commission	May 2010	-0.9	3.0	..
Consensus Forecast	May 2010	-1.0	2.4	..

Ireland - Real GDP growth projections 2010–12

Source	Date	2010	2011	2012
IMF	June 2010	-0.6	2.3	2.5
Department of Finance	Dec. 2009	-1.3	3.3	4.5
Central Bank	April 2010	-0.5	2.8	..
Economic and Social Research Institute	April 2010	-0.5	2.3	..
OECD	May 2010	-0.7	3.0	..
European Commission	May 2010	-0.9	3.0	..
Consensus Forecast	May 2010	-1.0	2.4	..

7. Ireland’s openness makes it subject to spillover risks. As a borrower and creditor, Ireland is deeply connected to international financial markets. It, therefore, is subject to international shocks, while also being a potential source of shocks with international implications. Greece’s prolonged vulnerability reduced the element of surprise, leading to relatively modest spillovers. Irish policy credibility also helped. The Greek exposure of Irish banks covered by the government’s guarantee is small.²

B. Employment

8. The high and persistent unemployment reflects ongoing structural changes. The headline unemployment rate increased from 4½ percent in 2007 to 13 percent in 2010:Q1; broader measures that include marginally-attached workers show the unemployment rate closer to 17 percent. The headline rate is likely to peak this year at 13¾ percent before declining to a still high 9½ percent by 2015. In addition to the cyclical component, the large increase in unemployment reflects significant structural changes with the unwinding of the boom years. The sharpest decrease in employment has occurred in construction and manufacturing. Some of these lost jobs may never come back, especially as the duration of unemployment increases, with the attendant depreciation of human capital and future growth prospects (Box 1).

9. Emigration has eased labor market pressures somewhat. Past Irish success has been attributed to the flexibility and openness of its labor market. Immigrants have been welcomed to support growth while the Irish themselves have emigrated when domestic prospects worsened. In this downturn, immigrants from the Central and Eastern European countries have left Ireland in noticeable numbers along with Irish nationals, while immigration has slowed. Based on the 2010:Q1 Labor Force Survey, staff estimates that the unemployment rate could have been as much as 2 percentage points higher without emigration.

Box 1.

Unemployment in Ireland

The unemployment response to the recession has been greater than predicted by historical patterns. On the basis of Okun’s law, the “unexplained” increase in unemployment over 2008–09 is 1.6 percentage points. Weakness in the labor market is also reflected in discouraged Irish workers who have left the labor force in large numbers, absent which the unemployment rate would have been higher.

Labor participation fell mainly among the younger population. Since the young are likely to return to the labor force as the economy recovers, the unemployment rate will tend to remain high. The fall in participation among older males is more of a concern since they may find it increasingly difficult to return to work.

In past years, Irish long-term unemployment has been relatively low, but it has more than doubled since 2007. Persistent unemployment may become a policy challenge going forward, and the younger generation could face discouragement and loss of human capital.

III. The Strength and Shape of the Recovery

10. The pace of recovery remains constrained by continuing imbalances. Staff projects that GDP growth will gradually recover to 3½ percent by 2015. This modest pace of recovery is due to a decline in potential growth that predates the crisis but was accentuated by it (Box 2). By staff’s estimates, the potential growth rate will rise gradually to about 2½ percent by 2015 as the internal imbalances—arising from rapid credit growth, overvalued property prices, and high price and wage levels—are corrected (Figure 1). The analysis cautions that the Irish economy may be in a regime with the relatively-modest potential growth and the high unemployment reinforcing each other. The authorities recognize these dislocations but are more optimistic about the medium-term growth prospects. They judge that the traditional flexibility and international openness of the Irish labor market will provide a self-correcting mechanism towards more robust growth.

Box 2.

Potential Output Growth after the Crisis

By 2007, Irish GDP growth had become unsustainable. Three different estimation methods suggest that the output was above potential by 5–7 percent in 2007. The collapse in output since then has taken it below potential, with estimates of the 2009 output gap ranging from −3½ to −7 percent.

Ireland’s potential growth had been declining before the crisis and has been temporarily further reduced. The pre-crisis slowdown in the potential growth rate reflected a maturing of the economy and the absence of new sources of sustainable growth. Following the crisis, lower investment rates, the fallout of the banking crisis, and higher structural unemployment have further dampened the growth potential. Staff sees potential growth rising from the current 1 percent to about 2½ percent, closing the output gap by 2015.

A. An Export-Led Recovery?

11. Irish exports fell less in the recent global downturn than did exports elsewhere. While German export volumes fell by 14¼ percent in 2009, the contraction of Irish exports was only 2¼ percent. A large chemicals’ export base helped as global chemicals’ trade, particularly of pharmaceuticals, held up even as another traditional Irish export, office machinery, fell sharply. Set against weak domestic demand, exports will likely lead the recovery. The question is whether exports will create a new dynamic that raises the economy to a higher performance trajectory.

12. Irish export dynamics have been tied to inward foreign investment. Multinationals, particularly from the United States, substantially raised their presence in Ireland in the late 1990s, linking Ireland to global supply networks of electronics and chemical products. This engagement in global supply chains was aided by wage moderation in the 1990s and by an educated labor force. Ireland’s export-to-GDP ratio rose. But, given the heavy import content of the exports, so did the import-to-GDP ratio. U.S. multinationals use Ireland as a base for exports to European markets, and about two-thirds of Irish exports are destined for Europe.

13. Even before the crisis hit, the rapid rise of Irish wage levels and increasing global competition had diminished traditional Irish advantages. The departure of Dell, a large manufacturing employer, to Poland in early 2009 was symbolic of a loss of edge in low-end manufacturing. Ireland’s share of the value of global and European manufactured exports, which had risen sharply between 1995 and 2001, fell steadily thereafter. In recent years, export growth has been sustained, though at lower levels than in the 1990s, by the repositioning of Ireland as a service exporter and “knowledge hub.”

Share of Imports of Services from Ireland

Source: Eurostat

14. The recent decline in unit labor costs from their high levels will need to be sustained to close the competitiveness gap and make a material difference to growth prospects. The CGER estimates suggest that the real effective exchange rate is broadly in line with medium-term fundamentals. However, the high Irish price and wage levels will require a period of “internal devaluation” over the next few years to support export growth. Nominal private sector wages rose to new heights through the end of 2008 before hourly wages started declining in early 2009. For now, however, unit labor costs have fallen primarily because of improvements in labor productivity. In turn, the productivity increase reflects mainly compositional shifts in the labor force as the relatively-unproductive construction industry has contracted. Thus staff was concerned that productivity increases may not continue and, hence, the decline in unit labor costs to competitive levels is not yet assured. The authorities expect wage compression to continue on account of continuing weakness in and flexibility of the Irish labor market.

Ireland: Application of the CGER methodology

Source: IMF staff calculations.

^{^1/}In percent of GDP.

^{^2/}Adjusted for multilateral consistency

Ireland: Application of the CGER methodology

	Macro-Balances	External Sustainability	Equilibrium Real Exchange Rate
Current account norm ^1/	-2.3	-3.0	…
Underlying current account balance ^1/	-0.6	-0.6	…
Competitiveness gap ^2/	-1.6	-3.9	6.0

Source: IMF staff calculations.

^{^1/}In percent of GDP.

^{^2/}Adjusted for multilateral consistency

Ireland: Application of the CGER methodology

	Macro-Balances	External Sustainability	Equilibrium Real Exchange Rate
Current account norm ^1/	-2.3	-3.0	…
Underlying current account balance ^1/	-0.6	-0.6	…
Competitiveness gap ^2/	-1.6	-3.9	6.0

Source: IMF staff calculations.

^{^1/}In percent of GDP.

^{^2/}Adjusted for multilateral consistency

15. While stressing recent improvements in competitiveness, the authorities agreed that the short-term prospects of Irish exports depend largely on partner country growth. Given the structure of exports, the authorities were mindful that narrow measures of competitiveness were insufficient. They viewed the recent depreciation of the euro as helpful and the gains in unit labor costs as a necessary, though not a sufficient, condition for export growth. Partner country growth is important, but the focus of Irish exports on Europe is not helpful. Among major trading blocs, Europe is recovering at the slowest pace. By staff’s projections, annual export growth will rise only gradually to 4–5 percent in 2013–15. For exports to grow faster continuing identification of new niches to counter lower-wage competition would be required.

16. Even with faster growth, the spillover from exports to the domestic economy will remain limited. An increase in Ireland’s exports, being highly correlated with an increase in imports, generates a much smaller increase in domestic value-added. Moreover, foreigners have large claims on the value-added generated in the export activity, as demonstrated by high correlation between the change in net trade and the change in income outflow on account of direct investment—the exceptions being the crisis years when imports fell for domestic reasons. Finally, Irish exporting activity has traditionally been relatively capital intensive, becoming more so with the downscaling of lower-skilled electronic assembly.

B. The Deflationary Drag

17. Prices have fallen. With output below potential and high unemployment, Irish prices have fallen while they have been stable or even rising elsewhere in the eurozone. The annual pace of price decline was 2½ percent in April, but moderated to 1.9 percent in May, largely due to higher energy costs. When the volatile components are removed from the core inflation index, the trimmed estimates show more rapid price decline. The fraction of components of the price index across which prices are falling peaked at 80 percent in April, but remained at a high of 67 percent in May.

18. The decline in prices reflects the high Irish price levels prior to the crisis and the collapse in domestic demand. Despite Ireland’s extensive trade relationships with the U.K., the depreciation of the British pound relative to the euro does not, in staff’s view, appear to be a primary source of the price decline. Irish import prices seem to have fallen after goods prices. Rather, Irish price levels were substantially higher than eurozone price levels prior to the crisis, mainly reflecting higher services prices but also higher goods prices (possibly because of the domestic distribution component). The ongoing fall in domestic demand implies that the adjustment to eurozone price levels will continue in the short term.

19. Real interest rates have risen sharply. In the boom years, Irish prices were rising more rapidly than average eurozone prices. This implied that real interest rates were especially low—and supported the boom. Following the crisis, there has been a tendency for countries with prior low real interest rates to flip to high real rates as they had greater imbalances to unwind. Ireland is an extreme example of this reversal.

20. Staff projects that Irish prices will continue to fall in the next two years. Ireland is currently among the most vulnerable nations to continued deflation. An index, capturing deflationary pressure based on indicators such as GDP growth, the output gap, the real exchange rate, equity prices, housing prices, credit growth, and monetary aggregates, suggests that Irish deflation is likely to persist into next year. After a 1.8 percent decline in prices this year, staff projects a further fall of 0.5 percent in 2011. The authorities expect inflation to turn positive next year. They view staff’s focus on domestic demand as unduly influenced by the experience of larger economies and, noting recent month-on-month price increases, emphasize that in Ireland’s small open-economy setting, exchange rate movements and short-run energy and food price increases would prevent further deflation.

Deflation Risk in Ireland

Source: WEO (2010) and staff calculations.

Deflation Risk in Ireland

	2005	2006	2007	2008	2009
Output gap widened more than −2 percent in past four Q?	no	no	no	yes	yes
Is growth in last three years < 2/3 growth in previous 10 years?	no	no	no	yes	yes
Has the equity index declined by more than 30 percent in the past 3 years?	no	no	no	yes	yes
Have nominal housing prices fallen more than 5 percent over the past year?	no	no	no	yes	yes
Is broad money growing slower than base money < 2 percent for last 2 years?	no	no	no	no	yes
Is GDP inflation < 0.5?	no	no	yes	no	yes
Is the latest output gap lower than −2 percent?	no	no	no	no	yes
Is CPI inflation < 0.5?	no	no	no	no	yes
Is core CPI inflation < 0.5?	no	no	no	no	yes
Has the real exchange rate appreciated more than 4 percent over the past year?	no	yes	yes	no	no
Is Q4/Q4 credit growth < Q4/Q4 nominal GDP growth?	no	no	no	no	no
Has cumulative credit growth been less than 10 percent over the past 3 years?	no	no	no	no	no

Source: WEO (2010) and staff calculations.

Deflation Risk in Ireland

	2005	2006	2007	2008	2009
Output gap widened more than −2 percent in past four Q?	no	no	no	yes	yes
Is growth in last three years < 2/3 growth in previous 10 years?	no	no	no	yes	yes
Has the equity index declined by more than 30 percent in the past 3 years?	no	no	no	yes	yes
Have nominal housing prices fallen more than 5 percent over the past year?	no	no	no	yes	yes
Is broad money growing slower than base money < 2 percent for last 2 years?	no	no	no	no	yes
Is GDP inflation < 0.5?	no	no	yes	no	yes
Is the latest output gap lower than −2 percent?	no	no	no	no	yes
Is CPI inflation < 0.5?	no	no	no	no	yes
Is core CPI inflation < 0.5?	no	no	no	no	yes
Has the real exchange rate appreciated more than 4 percent over the past year?	no	yes	yes	no	no
Is Q4/Q4 credit growth < Q4/Q4 nominal GDP growth?	no	no	no	no	no
Has cumulative credit growth been less than 10 percent over the past 3 years?	no	no	no	no	no

Source: WEO (2010) and staff calculations.

21. Given the sharp increase in leverage, this will be a drag on the pace of recovery. In order to achieve the required internal devaluation, some fall in Irish prices is necessary. However, in the transition to lower price levels, deflation will slow the pace of recovery. The debt of households and businesses, fueled by the low real interest rates before the crisis and with unchanged nominal values, has now to be repaid in an environment of falling prices, higher real interest rates, and low GDP growth rates. These factors lead staff to conclude that the normally-sharp bounce back to close the output gap after a large output decline will be muted on account of the deflationary drag.

C. Macro-Financial Linkages

22. As banks emerge from the worst phase of the crisis, they remain weak. While capital ratios of the eurozone banks have risen since the crisis, they have declined for the large Irish banks. Banks’ reliance on wholesale funding—and, hence, high loan-to-deposit ratios—has yet to be corrected significantly. The ratio of nonperforming loans (NPLs) to all loans increased from ¾ percent at end-2007 to 9 percent at end-2009 and can only be expected to increase further, particularly if rescheduled loans fall into arrears. In the meantime, the ability to provision for these NPLs has declined sharply.

23. Liquidity pressures remain serious. The authorities estimate that over €70 billion (44 percent of GDP) of banks’ obligations will mature by September this year. This includes long-term debt, commercial paper, certificates of deposit, and interbank deposits. The maturity of the long-term debt is tied to the expiration of the two-year blanket guarantee provided in September 2008, covering all banks’ liabilities. The rollover needs may be somewhat less since some debt has been pre-funded and the deleveraging will diminish the banks’ financing requirements. Nevertheless, the sizeable rollover of banks’ funding in the third quarter of this year will outstrip the sovereign’s direct annual borrowing needs. Through September, the Government’s Eligible Liabilities Guarantee scheme will cover new issuance of up to five years’ maturity, subject to review by the European Commission. Depending on market conditions, an extension of this scheme may be needed. Irish banks have also been heavy users of ECB liquidity facilities. The stock of retail bank deposits has been either flat or declining.

24. In response to constrained capital and liquidity, banks have tightened credit standards. Banks’ credit standards for firms have tightened continuously since mid-2007. Standards for mortgage and consumer credit, having tightened, are stabilizing. Staff analysis shows that as Irish banks become weaker, credit standards tighten, restricting credit (Box 3). The observed decline in the net flow of credit is, thus, consistent with tighter lending standards. The authorities rightly noted that credit demand had also fallen, and banks were reporting that they were currently limited by lack of good lending prospects. Staff and the authorities agreed that distinguishing supply and demand effects was difficult and staff analysis was cautionary regarding the ability of the banks to lend for a recovery.

Box 3.

Macro-Financial Linkages

Banks’ health is an important determinant of their willingness to lend. For Ireland, the statistical evidence suggests that the ratio of bank stock prices relative to the overall stock market—a proxy for bank health—helps explain bank lending standards. A fall of 0.5 in this ratio is estimated to cause a gradual tightening of consumer and corporate lending standards by about ⅓ and 1, respectively, on a scale between one and five (one denotes a considerable tightening of standards and five a considerable easing).

Bank lending standards have an important effect on different types of credit. The average quarterly tightening of lending standards in Ireland during the latest tightening cycle has been approximately 0.1. Such tightening is estimated to cause credit contraction of 0.15 percent of GDP for consumer loans and 0.5 percent of GDP for mortgage and corporate loans. Relative to the gross new lending that occurred in the last quarter of 2009, this corresponds to about 5 percent of consumer loans, 3 percent of mortgage loans and 1 percent of corporate loans.

Credit availability matters for consumption and investment decisions as well as house prices. An increase in consumer credit of one euro is associated with increased consumption of 80 cents with a one-quarter lag and a further 80 cents after one year. A corporate loan of one euro is associated with increased investment of 30 cents contemporaneously and an additional 40 cents after three quarters. Mortgage credit has a significant contemporaneous effect on house prices, which indirectly affects residential investment.

25. Recognizing these developments, the authorities have raised targets for core-Tier 1 capital. Weakness of the financial sector, fall in real estate prices, and high unemployment could continue to reinforce each other. For this reason, current policy efforts to boost banks’ capital ratios are important and will help counter these tendencies. The Financial Regulator has set a target ratio of 8 percent for core-Tier 1 capital (of which 7 percent is to be equity capital) taking into account losses arising from the ongoing transfer of loans to NAMA as well as future expected losses on non-NAMA assets until 2012. The required capital injections will also ensure that banks’ core-Tier 1 capital would remain above 4 percent in a stress scenario.

26. But these efforts may be insufficient to finance the early phases of the recovery. The recent rights issue by one major bank indicates that some private capital is returning to banks; but the authorities are committed to fill the remaining gaps to ensure that bank capital will not be a constraint on lending. However, as they recognize, deleveraging to reduce the loan-to-deposit ratio and banks’ risk aversion will likely constrain lending and the pace of economic recovery, at least in 2010–11. Higher than expected losses, uncertainties in global regulatory trends, and renewed financial market tensions—that may restrict access to funding—create downside risks. In this environment, targets for SME lending, which have been imposed on two major banks in 2010–11, could have adverse effects on credit quality and hence require strong prudential safeguards, as the nonperforming loans of this sector have grown rapidly.

IV. Financial Sector: Restructuring and Stability

27. The next steps in the financial sector agenda are usefully thought of in two parts. Restructuring measures are needed to address the continued fallout from the crisis; and a stronger framework for financial stability, which incorporates lessons from the crisis, will limit future instability. Together, these measures should help phase out of the government’s guarantees of bank liabilities.

A. Restructuring

28. First, NAMA should schedule an orderly disposal of the property assets acquired. NAMA is to manage the assets acquired with the aim of achieving the best possible return for the taxpayer over a 7–10 year timeframe (Box 4). The authorities agreed a holistic approach to NAMA’s success was needed. Rather than aiming to time the market for an upturn in property prices, the goal should be to reduce the large overhang of property in state hands (which could keep investors on the sidelines and prices low), restart market transactions and, thus, help normalize the property market. The lesson from the experience of all asset management companies—including those that dealt primarily with commercial real estate (in Sweden and the Resolution Trust Corporation (RTC) in the United States)—is that a sound and transparent process for the management of asset sales is needed, but moving ahead with early sales is important.³ Governance of NAMA is strengthened by its independent board. However, given the government’s large presence in the property market, implementing the provisions for the oversight of NAMA’s operations, is vital.

Box 4.

The National Asset Management Agency

The National Asset Management Agency (NAMA) was established in late 2009 to take over distressed property-development and commercial real estate assets from five of the banks covered by the government’s guarantee on banks’ liabilities. Under the completed first tranche, NAMA has acquired loans with a book value of €15.3 billion for about €7.7 billion, representing an average discount of 50 percent. In total, about €81 billion worth of loans are to be acquired at a deep discount by the end of this year.

The participating institutions receive government-guaranteed securities in return for the assets purchased by NAMA. Assuming an average discount of 50 percent, NAMA would ultimately issue about €41 billion of securities in total, up to 5 percent of which would not have to be honored if the proceeds from the asset sales fall short. The purchase and management of acquired assets is delegated to a Special Purpose Vehicle with 51 percent private ownership but under NAMA’s control. For this reason, the NAMA-issued securities are to be treated as off-balance sheet in the Irish budget. A contingent liability—of 25 percent of GDP—will be extinguished if NAMA recovers its outlays.

For the banks, the loans sales will reduce the uncertainty about the soundness of their balance sheets and increase their liquidity reserves. Replacing risky property-related loans with risk-free NAMA bonds reduces banks’ risk-weighted assets and hence improves capital adequacy. Capital shortfalls due to the NAMA discounts are being met by a combination of private and public capital injections.

29. The increasing economic stress will require targeted support for homeowners. With increasing arrears and reschedulings, the Financial Regulator has cautioned that homeowner distress may be the “biggest legacy” of the crisis. The Regulator has required banks to wait 12 months from when arrears arise to initiate repossession on a primary residence if the borrower is engaged in restructuring arrangements. Government programs also assist with interest payments for mortgages originated in recent years and interest supplement to the neediest. The authorities noted that further support measures raise the risk of moral hazard, and, hence, of strategic default, and create a perception of unfairness. A working group on Mortgage Arrears and Personal Debt Review is studying available options. Mindful of these considerations, staff proposed that, with persisting unemployment, additional support measures may be needed for a narrowly-targeted group of vulnerable homeowners to limit the economic and social fallout of the crisis. With their capital bolstered by the state, banks could absorb the initial costs, perhaps basing themselves on the welfare system to identify eligible beneficiaries.

30. This process will be aided by an overdue shift to a more efficient and balanced personal insolvency regime. The authorities noted that discussions were ongoing regarding inclusion in the law of an optional out-of-court resolution mechanism, and whether this may apply to small businesses as well as individuals. This would allow a more timely and flexible, as well as less costly alternative to the current legal framework. Staff pointed out that a repayment period of three to five years and the removal of overly punitive elements such as imprisonment for nonpayment of civil debts would bring the regime more in line with European practices.

31. The authorities’ intent to proactively reshape the system is appropriate. Some evolutionary restructuring is occurring: some foreign banks are scaling down their Irish operations. Currently, however, the authorities are focused on bank-by-bank restructuring of banks benefiting from government support. While much of this relies on disposal of noncore assets, in one case, the authorities are also contemplating a “good bank/bad bank” split of the residual operations after moving some of the riskier assets to NAMA. Staff strongly supported the authorities’ move to mandating a strategic unit within the National Treasury Management Agency, which also houses NAMA, to foster a market-oriented approach to achieve a future viable and competitive banking system.

B. Financial Stability

32. Considerable progress has been achieved in establishing a more assertive regulatory and supervisory system. Following evolving international practice, the authorities have set targets for higher and better quality capital, while also focusing on improved liquidity management. They are moving to strengthen the governance of banks’ boards, raise the fitness and probity requirements of senior managers and board members, and create further safeguards against related-party lending. In parallel, the de facto consolidation of the Central Bank and the Financial Regulator, the bill to formalize this arrangement (including more accountability of the Regulator), the new risk-based supervisory approach, and plans to upgrade onsite supervision are all steps in the right direction. The key challenge is to ensure that these plans are implemented in a timely manner through adequate resources and enhanced enforcement powers.

33. More immediate attention is needed to establish a special bank resolution framework. Recent discussions at the European level emphasize timely bank resolution, triggered by more prudent thresholds. This, in turn, requires a legal framework allowing for broader resolution tools such as the establishment of bridge banks and the assumption of liabilities and the purchase of assets. Some European countries have begun to establish special resolution regimes, with the U.K. taking the lead. The authorities recognize the merits of a special bank resolution framework, and the delay in establishing one reflects discussion on choices with respect to the tools suitable for Ireland. Staff emphasized that early action to introduce a special bank resolution mechanism is needed to meet contingencies and strengthen the stability framework. The operational arrangements of the deposit guarantee scheme are being bolstered, and the authorities recognize the need for additional premiums from banks when they return to greater normalcy.

34. To complement regulatory safeguards, and to reduce and meet the costs of future crises, a financial stability charge could be contemplated. Such a charge would have two elements. A risk-adjusted levy, tied to a credible resolution mechanism, would provide resources for a resolution fund to be used for future crises. A financial activities tax, levied on the profits and remuneration (of senior executives) would represent a fair contribution from the sector to general revenues but also serve the purpose of reducing the sector’s size and, hence, its systemic risk. Such tax measures remain controversial but are being contemplated in a number of other countries. The authorities noted that Ireland would be guided by the evolving international practice and these initiatives may need to be deferred until more normal conditions apply.

V. The Fiscal Outlook and Consolidation Agenda

A. The Outlook

35. To counter the deteriorating fiscal position, the authorities moved early to make substantial, balanced, and lasting consolidation efforts. As the fiscal situation deteriorated and a large structural deficit emerged (Box 5), the authorities acted repeatedly to take additional measures and raise the ambition of their fiscal consolidation goals. This was achieved in a remarkably socially-cohesive manner and represented a balance of economic and social considerations. The strong upfront measures are expected to yield a net adjustment of 5½ percent of GDP over 2009–10. The 2010 budget focused on expenditure measures: reductions in the wage bill, social welfare benefits, and public services spending, in particular health care and education. The scope of public service pensions was reduced for new entrants, starting in 2010. Within the imperative to consolidate, efforts were made to maintain activity and employment, and safeguard those worst hit by the recession. Revenue measures included a carbon tax, to provide incentives for low-carbon energy.

Box 5.

Asset Booms and Structural Fiscal Balances

Tax revenues were boosted by the property bubble. For Ireland, revenues from capital taxes and stamp duties increased from 2 percent in 2000 to 4 percent of GDP in 2007, while VAT increased one percentage point of GDP to 7½ percent over that period. At their peak in 2007, these revenues represented over a third of total current revenues. In contrast, they were one fifth of current revenues in Spain and the U.K., two other countries with large asset booms.

These asset-related revenues encouraged increases in structural expenditures. When adjusting for the impact of asset prices, the Irish structural deficit reached 8 percent in 2007, spiking to 12 percent of GDP in 2008. Spain and the U.K. also experienced sharp but smaller increases in structural deficits. However, after fiscal adjustment of 5½ percent of GDP, the Irish structural deficit is expected to decline to 8½ percent of GDP in 2010, while discretionary fiscal stimulus has raised the structural deficits in Spain and the U.K.

36. The 2010 budget adheres to the consolidation track, but risks remain. The authorities project the 2010 deficit to be 11½ percent of GDP. Because of lower nominal 2009 GDP than assumed in the 2010 budget and a weaker growth projection, staff projects lower revenues, leading to a deficit of 11.9 percent of GDP in 2010. The accounting treatment of the government’s equity injections into the troubled banks is still being determined but could raise the 2010 headline deficit substantially.⁴ The authorities noted that the associated fiscal outlays have already been incorporated into the official debt figures.

37. The remaining sovereign financing need in 2010 is limited. The average maturity of Irish treasury bonds is high—at 7½ years—and the rollover need is therefore limited. For 2010, about three quarters of the planned government bond issuance (€20 billion) had been obtained as of June. The annual financing needs in 2011–12 are projected at about the 2010 level. The authorities maintain sizeable cash balances, financed by short-term debt, which could act as a buffer against any temporary difficulties in issuing long-term debt.

38. Staff supports the appropriately ambitious fiscal consolidation plan through 2014 but cautioned that the required adjustment may be larger than projected by the authorities. The consolidation plan, outlined in the December 2009 Stability Programme Update, aims to reduce the deficit to below 3 percent of GDP by 2014. The plan envisages fiscal adjustment of 4½ percent of GDP over 2011–14, of which about 1 percent of GDP represents reductions in capital expenditures. The staff’s macroeconomic projections imply that the required medium-term adjustment could be larger than projected by the authorities. Starting from a higher projected deficit in 2010 and based on less optimistic macroeconomic projections, staff estimates that the adjustment need over 2011–14 would be 6½ percent of GDP, 2 percentage points of GDP higher than the authorities do. The authorities concurred with staff on the importance of meeting the targets they have set within the agreed timeframe.

Ireland - Fiscal Projections 2009–14

(Percent of GDP)

^{^1/}The difference between the fiscal projections of the Department of Finance and the IMF staff is due in part to assumptions of lower growth on the part of the IMF staff. The IMF staff’s baseline fiscal projections for 2011–12 incorporate the adjustment efforts announced by the authorities in their December 2009 Stability Programme Update, although 2/3 of these measures remain to be specified. For the remainder of the period, the IMF staff’s projections do not incorporate the further adjustments efforts outlined in the Stability Programme Update. However, the Irish authorities have committed to the implementation of these additional adjustment measures, which is supported by their favorable track record to date in taking the necessary actions to attain budgetary targets.

^{^2/}In percent of potential GDP.

Source: December 2009 SGP Update and staff projections.

Ireland - Fiscal Projections 2009–14

(Percent of GDP)

		2009	2010	2011	2012	2013	2014
Revenue		33.6	34.5	34.9	36.4	36.8	36.9
Tax revenue (incl. capital tax)		21.8	21.1	22.0	23.5	23.9	24.1
Social insurance contribution		5.5	5.7	5.7	5.7	5.7	5.7
Other current revenues		5.2	6.3	5.8	5.8	5.8	5.8
Capital revenues		1.0	1.3	1.3	1.3	1.3	1.3
Expenditure		47.9	46.4	46.0	45.0	44.0	42.8
Wages and salaries		12.1	11.2	10.7	10.2	9.8	9.5
Goods and services		6.0	5.8	5.7	5.5	5.3	5.1
Current transfers		18.6	19.9	19.9	18.9	18.3	17.3
Interest payments		2.1	2.8	3.3	3.8	4.1	4.4
Other		1.4	1.5	1.7	1.8	1.8	1.8
Capital expenditure		7.7	5.1	4.8	4.8	4.8	4.8
Overall balance		-14.3	-11.9	-11.1	-8.6	-7.3	-5.9
Authorities target ^1/		..	-11.6	-10.0	-7.2	-4.9	-2.9
	difference due to macroprojections	..	-0.3	-1.1	-1.4	-1.6	-1.8
	difference due to assumed measures	..	..	..	..	-0.8	-1.2
Structural balance ^2/		-9.8	-8.2	-6.8	-5.9	-5.6	-5.2
General government debt		64.0	86.2	94.7	96.9	97.5	97.7

^{^2/}In percent of potential GDP.

Source: December 2009 SGP Update and staff projections.

Ireland - Fiscal Projections 2009–14

(Percent of GDP)

		2009	2010	2011	2012	2013	2014
Revenue		33.6	34.5	34.9	36.4	36.8	36.9
Tax revenue (incl. capital tax)		21.8	21.1	22.0	23.5	23.9	24.1
Social insurance contribution		5.5	5.7	5.7	5.7	5.7	5.7
Other current revenues		5.2	6.3	5.8	5.8	5.8	5.8
Capital revenues		1.0	1.3	1.3	1.3	1.3	1.3
Expenditure		47.9	46.4	46.0	45.0	44.0	42.8
Wages and salaries		12.1	11.2	10.7	10.2	9.8	9.5
Goods and services		6.0	5.8	5.7	5.5	5.3	5.1
Current transfers		18.6	19.9	19.9	18.9	18.3	17.3
Interest payments		2.1	2.8	3.3	3.8	4.1	4.4
Other		1.4	1.5	1.7	1.8	1.8	1.8
Capital expenditure		7.7	5.1	4.8	4.8	4.8	4.8
Overall balance		-14.3	-11.9	-11.1	-8.6	-7.3	-5.9
Authorities target ^1/		..	-11.6	-10.0	-7.2	-4.9	-2.9
	difference due to macroprojections	..	-0.3	-1.1	-1.4	-1.6	-1.8
	difference due to assumed measures	..	..	..	..	-0.8	-1.2
Structural balance ^2/		-9.8	-8.2	-6.8	-5.9	-5.6	-5.2
General government debt		64.0	86.2	94.7	96.9	97.5	97.7

^{^2/}In percent of potential GDP.

Source: December 2009 SGP Update and staff projections.

39. The trajectory of the government’s outstanding debt ratio will depend on the size and nature of the support to the financial sector. Since the SGP Update, the authorities have incorporated into their debt projections the promissory notes for bank support that were issued in early 2010. Going forward, staff projects government debt to increase steadily until 2014, but to stabilize below 100 percent. On the basis of Eurostat’s preliminary advice, debt issued by NAMA’s privately-owned Special Purpose Vehicle does not affect the general government debt, although it would represent a contingent liability of more than 25 percent of GDP in 2010.

B. The Consolidation Strategy

40. The authorities agreed that expenditure savings will remain central to achieving the consolidation targets. The recent expenditure commission identified detailed potential reductions yielding savings of €5.3 billion (3½ percent of GDP), of which about €2 billion have been implemented in the 2010 budget. Looking ahead, although capital and multi-annual spending reduction plans have indicated the size of the adjustment needed in each year, they are not backed by sufficient specificity. In response to staff’s view that more detail would provide further confidence regarding the durability of their consolidation effort, they noted that initial steps towards establishing a medium-term framework had been taken. Thus, more generally, they foresee efficiency savings from the ongoing public services modernization, particularly in the health and education sectors. To underpin these gains, a draft public service agreement has been ratified by labor unions for the reduction in the number of public service employees through nonreplacement and flexible redeployment. Social welfare transfers were reduced in the previous budget, but entitlement reforms could generate further savings.

41. The authorities recognize that revenue enhancement should contribute to the consolidation. Taking into account the recommendations of the tax commission and consistent with staff advice, the authorities are currently developing proposals to reform income taxation, with the aim to simplify and broaden the income tax base. The reform would include eliminating tax exemptions, reviewing the income tax bands, consolidating the current levies and introducing a universal social charge. The authorities agreed that property taxation would also help broaden the tax base while at the same time making it more stable than the current system of stamp duties. In the transition to a valuation-based tax, a flat tax rate is under consideration.

42. Now is also a good moment to establish an institutional process to reinforce the collective commitment to stable public finances. The authorities recognize the risk of “consolidation fatigue” and, hence, a fraying of the social cohesion needed to complete the consolidation task. In principle, they agreed with staff that institutionalizing the commitment to fiscal goals could prove valuable, and consideration is being given to bolstering the institutional arrangements. The authorities regard with greater favor a medium-term expenditure framework to reduce the uncertainties associated with the consolidation process, while also constraining excesses in good times ahead. They indicated that they are considering how to strengthen institutional arrangements in this regard. While acknowledging the limitations of fiscal rules and councils, staff maintained that these institutions would enhance policy credibility now and in the future. A fiscal rule, consistent with the Stability and Growth Pact, would create a public metric for sound public finances and a technocratic fiscal council could advise on risks underlying public finances.

VI. Staff Appraisal

43. Ireland is emerging from a deep slump into a modestly-paced recovery. Helped by active policy stabilization measures and, increasingly, by the improved global outlook, GDP is expected to resume growing this year. However, because GDP fell steeply and through much of last year, the 2010 real GDP is expected to be about ½ percent lower than in 2009. As the crisis-related dislocations are corrected, GDP growth should increase gradually to about 3½ percent by 2015, while unemployment should decline from a peak of about 13¾ percent this year to still high 9½ percent.

44. A continuation of vigorous policy efforts is required with an emphasis on risk management. The challenge is to wean the banking sector from public support and stabilize public debt in a testing environment of gradual domestic economic recovery and episodic international market tensions. Mindful, therefore, that unforeseen fiscal shocks and, at times, heavily bunched banks’ funding needs could constrain policy options along the narrow path to stability and recovery, active risk management should guide policy priorities. This will require a continued visible demonstration of commitment to the goals set. But with limited fiscal space, the commitment will need to be backed increasingly by mechanisms for accountability and oversight to anticipate and contain slippages and surprises.

45. To address the fallout from the crisis, three restructuring priorities deserve attention. Having acquired risky assets, NAMA’s task would include restoring the commercial property market through an orderly schedule of market transactions. Economically-vulnerable homeowners will likely need narrowly-targeted support, including through banks that have been recapitalized by the state. And, following the stabilization effort through bank-by-bank restructuring, a strategic, market-oriented view should help reshape the banking sector.

46. Much progress has been made on the financial stability agenda, but a special bank resolution scheme remains an important gap. The de facto combination of the Central Bank and the Financial Regulator is being formalized. The new assertive, risk-based supervisory approach is welcome and needs to be backed by further resources and enforcement powers. The establishment of special bank resolution regime, which has been recognized internationally as a key stability tool, requires immediate attention.

47. In their 2010 budget, the authorities have stayed on course towards their consolidation goals, but much remains to be done. The authorities’ consolidation target and path remain appropriate. The plan also strikes the right balance with its central reliance on expenditure reduction complemented by necessary revenue enhancement through a broader tax base. However, in a tense market environment for sovereign debt, the authorities should be prepared with additional measures to meet their targets in case of unexpected fiscal demands. The commitment to the consolidation path will be reinforced by greater specificity on the measures foreseen.

48. This is also a good moment to establish a stronger fiscal framework. A medium-term fiscal framework incorporating expenditure ceilings is a valuable management tool that will help create greater transparency of fiscal priorities and reduce fiscal volatility. Recognizing their limits, a fiscal rule would be a helpful public metric of fiscal prudence and a technocratic fiscal council would help dampen fiscal risks.

49. The next Article IV consultation with Ireland is expected to take place on the standard 12-month cycle.

Table 1.

Ireland: Selected Economic Indicators

(Annual change unless otherwise stated)

Sources: Department of Finance; Central Bank of Ireland; IFS; Bloomberg; and Fund staff calculations.

^{^1/}Contribution to growth. However, the data for exports and imports of goods and services are annual growth rates.

^{^2/}Adjusted change, which includes the effects of transactions between credit institutions and non-bank international financial companies and valuation effects arising from exchange rate movements.

Table 1.

Ireland: Selected Economic Indicators

(Annual change unless otherwise stated)

									Proj.
				2005	2006	2007	2008	2009	2010
National accounts (constant prices)
	GNP			5.6	6.3	4.4	-2.8	-11.3	-1.7
	GDP			6.2	5.4	6.0	-3.0	-7.1	-0.6
		Domestic demand		8.6	6.1	4.1	-4.4	-13.9	-3.4
			Private consumption	6.6	6.6	5.9	-1.0	-7.2	-1.4
			Public consumption	3.8	5.8	6.9	2.6	-1.2	-2.0
			Gross fixed investment	14.7	4.0	2.3	-15.5	-29.7	-15.0
		Net exports ^1/		-1.6	-0.6	2.8	0.7	4.7	3.9
			Exports of goods and services	5.2	5.1	8.6	-1.0	-2.3	3.0
			Imports of goods and services	8.4	6.5	5.6	-2.1	-9.3	-1.8
Gross national saving (in percent of GDP)				23.6	24.6	21.5	16.9	11.1	11.8
	Private			19.6	18.7	18.8	21.3	25.0	26.3
	Public			4.5	5.9	2.7	-4.4	-13.9	-14.5
Gross investment (in percent of GDP)				27.1	27.9	26.0	21.9	13.9	11.8
	Private			23.6	24.2	21.2	16.5	9.3	7.3
	Public			3.5	3.7	4.8	5.4	4.5	4.6
Prices, wages and employment
		Harmonized Index of Consumer Prices (annual average)		2.2	2.7	2.9	3.1	-1.7	-1.8
		Average wages, all economy		5.1	5.5	5.2	3.5	-1.0	-2.6
		Output, manufacturing		4.1	3.1	5.3	-2.1	-6.3	-0.6
		GNP/employment		0.6	1.9	0.7	-1.7	-3.5	1.2
		Employment		4.9	4.4	3.6	-1.1	-8.1	-2.9
		Unemployment rate (in percent)		4.4	4.4	4.6	6.3	11.8	13.5
Money and credit (end-period)
		Irish contribution to euro area money supply: M3		22.1	28.5	9.6	-1.9	-1.5	…
		Irish resident private sector credit ^2/		28.8	25.9	17.0	7.3	-7.6	…
Financial and asset markets (end-period)
	3-month interbank rate			2.5	3.7	4.6	3.0	0.6	…
	10-year government bond			3.3	4.0	4.5	4.4	4.9	…
		ISEQ index		16.8	27.8	-26.3	-66.2	27.0	…
		House prices (permanent tsb index/ESRI)		9.3	11.8	-7.3	-9.1	-18.5	…
Public finance (in percent of GDP)
		General government balance		1.6	2.9	0.1	-7.3	-14.3	-11.9
		Primary balance		2.7	3.8	0.9	-6.2	-12.2	-9.1
		General government debt		27.3	24.9	25.0	43.9	64.0	86.2
External trade and balance of payments
	Balance of goods and services (percent of GDP)			11.7	10.3	9.8	10.1	16.9	20.4
	Current account (percent of GDP)			-3.5	-3.6	-5.3	-5.2	-2.9	-0.3
	Official reserves (in billions of euros, end-period)			0.7	0.6	0.6	0.7	1.5	…
Effective exchange rates (1999Q1=100, annual average)
	Nominal			104.1	104.4	107.4	113.0	112.5	…
	Real (CPI based)			115.4	116.0	120.1	125.6	121.9	…
Memorandum items:
	Population (in millions)			4.1	4.2	4.3	4.4	4.5	4.5
	GDP per capita (in euros)			39,211	41,690	43,732	41,115	36,674	35,624

Sources: Department of Finance; Central Bank of Ireland; IFS; Bloomberg; and Fund staff calculations.

^{^1/}Contribution to growth. However, the data for exports and imports of goods and services are annual growth rates.

Table 1.

Ireland: Selected Economic Indicators

(Annual change unless otherwise stated)

									Proj.
				2005	2006	2007	2008	2009	2010
National accounts (constant prices)
	GNP			5.6	6.3	4.4	-2.8	-11.3	-1.7
	GDP			6.2	5.4	6.0	-3.0	-7.1	-0.6
		Domestic demand		8.6	6.1	4.1	-4.4	-13.9	-3.4
			Private consumption	6.6	6.6	5.9	-1.0	-7.2	-1.4
			Public consumption	3.8	5.8	6.9	2.6	-1.2	-2.0
			Gross fixed investment	14.7	4.0	2.3	-15.5	-29.7	-15.0
		Net exports ^1/		-1.6	-0.6	2.8	0.7	4.7	3.9
			Exports of goods and services	5.2	5.1	8.6	-1.0	-2.3	3.0
			Imports of goods and services	8.4	6.5	5.6	-2.1	-9.3	-1.8
Gross national saving (in percent of GDP)				23.6	24.6	21.5	16.9	11.1	11.8
	Private			19.6	18.7	18.8	21.3	25.0	26.3
	Public			4.5	5.9	2.7	-4.4	-13.9	-14.5
Gross investment (in percent of GDP)				27.1	27.9	26.0	21.9	13.9	11.8
	Private			23.6	24.2	21.2	16.5	9.3	7.3
	Public			3.5	3.7	4.8	5.4	4.5	4.6
Prices, wages and employment
		Harmonized Index of Consumer Prices (annual average)		2.2	2.7	2.9	3.1	-1.7	-1.8
		Average wages, all economy		5.1	5.5	5.2	3.5	-1.0	-2.6
		Output, manufacturing		4.1	3.1	5.3	-2.1	-6.3	-0.6
		GNP/employment		0.6	1.9	0.7	-1.7	-3.5	1.2
		Employment		4.9	4.4	3.6	-1.1	-8.1	-2.9
		Unemployment rate (in percent)		4.4	4.4	4.6	6.3	11.8	13.5
Money and credit (end-period)
		Irish contribution to euro area money supply: M3		22.1	28.5	9.6	-1.9	-1.5	…
		Irish resident private sector credit ^2/		28.8	25.9	17.0	7.3	-7.6	…
Financial and asset markets (end-period)
	3-month interbank rate			2.5	3.7	4.6	3.0	0.6	…
	10-year government bond			3.3	4.0	4.5	4.4	4.9	…
		ISEQ index		16.8	27.8	-26.3	-66.2	27.0	…
		House prices (permanent tsb index/ESRI)		9.3	11.8	-7.3	-9.1	-18.5	…
Public finance (in percent of GDP)
		General government balance		1.6	2.9	0.1	-7.3	-14.3	-11.9
		Primary balance		2.7	3.8	0.9	-6.2	-12.2	-9.1
		General government debt		27.3	24.9	25.0	43.9	64.0	86.2
External trade and balance of payments
	Balance of goods and services (percent of GDP)			11.7	10.3	9.8	10.1	16.9	20.4
	Current account (percent of GDP)			-3.5	-3.6	-5.3	-5.2	-2.9	-0.3
	Official reserves (in billions of euros, end-period)			0.7	0.6	0.6	0.7	1.5	…
Effective exchange rates (1999Q1=100, annual average)
	Nominal			104.1	104.4	107.4	113.0	112.5	…
	Real (CPI based)			115.4	116.0	120.1	125.6	121.9	…
Memorandum items:
	Population (in millions)			4.1	4.2	4.3	4.4	4.5	4.5
	GDP per capita (in euros)			39,211	41,690	43,732	41,115	36,674	35,624

Sources: Department of Finance; Central Bank of Ireland; IFS; Bloomberg; and Fund staff calculations.

^{^1/}Contribution to growth. However, the data for exports and imports of goods and services are annual growth rates.

Table 2.

Ireland: Summary of Balance of Payments

Sources: The Central Statistics Office; and Fund staff estimates.

Table 2.

Ireland: Summary of Balance of Payments

								Proj.
					2005	2006	2007	2008	2009	2010	2011	2012
					(In billions of euros)
Current account balance					-5.7	-6.3	-10.1	-9.4	-4.8	-0.4	-0.8	-1.1
	Balance of goods and services				18.9	18.2	18.7	18.4	27.7	32.5	36.2	39.2
			Trade balance		28.2	25.0	19.8	23.8	32.6	38.7	41.4	42.7
			Exports of goods		82.7	83.2	84.1	81.5	78.0	86.3	90.6	93.7
			Imports of goods		-54.5	-58.2	-64.3	-57.7	-45.3	-47.6	-49.2	-51.0
		Services balance			-9.3	-6.8	-1.1	-5.4	-5.0	-6.1	-5.1	-3.5
			Credit		48.2	57.1	68.0	69.2	69.3	66.4	68.0	72.6
			Debit		-57.5	-63.9	-69.1	-74.6	-74.3	-72.5	-73.1	-76.2
			Of which: Royalties
				Credit	0.6	0.7	0.9	0.9	1.2	…	…	…
				Debit	-15.5	-17.5	-17.5	-20.6	-23.9	…	…	…
	Income balance				-24.9	-24.0	-27.8	-26.8	-31.6	-32.5	-33.9	-37.0
			Credit		43.4	66.1	84.9	83.8	53.7	57.7	56.3	50.5
			Debit		68.3	90.1	112.7	110.6	85.3	90.1	90.1	87.5
	Current transfers (net)				0.3	-0.5	-1.0	-1.1	-0.9	-0.5	-3.2	-3.3
Capital and financial account balance					-0.2	5.0	12.1	16.1	-3.7	0.4	0.8	1.1
	Capital account balance				0.3	0.2	0.0	0.1	0.0	…	…	…
	Financial account				-0.5	4.8	12.1	16.1	-3.7	…	…	…
		Direct investment			-37.0	-16.6	2.6	-22.9	3.0	…	…	…
		Portfolio investment			52.7	8.1	-7.3	-39.4	29.9	…	…	…
		Other investment			-17.7	13.2	16.7	78.4	-36.8	…	…	…
		Change in reserve assets			1.5	0.1	0.0	-0.1	0.1	…	…	…
Net errors and omissions					5.9	1.3	-2.0	-6.7	8.5	…	…	…
					(In percent of GDP)
	Current account balance				-3.5	-3.6	-5.3	-5.2	-2.9	-0.3	-0.5	-0.6
		Balance on goods and services			11.7	10.3	9.8	10.1	16.9	20.4	22.1	22.9
			Trade balance		17.4	14.2	10.4	13.1	20.0	24.3	25.2	24.9
			Services balance		-5.7	-3.8	-0.6	-3.0	-3.0	-3.9	-3.1	-2.0
		Income balance			-15.3	-13.6	-14.7	-14.7	-19.3	-20.4	-20.6	-21.6
		Current transfers			0.2	-0.3	-0.5	-0.6	-0.6	-0.3	-1.9	-1.9
	Capital and financial account balance				-0.1	2.8	6.4	8.9	-2.3	0.3	0.5	0.6
		Of which:
			Direct investment		-22.8	-9.4	1.4	-12.6	1.9	…	…	…
			Portfolio investment		32.5	4.6	-3.8	-21.6	18.3	…	…	…
			Other investment		-10.9	7.5	8.8	43.1	-22.5	…	…	…
Memorandum items (percent of GDP)
Reserve assets					0.5	0.4	0.3	0.4	0.9	…	…	…
Gross external debt					698.8	757.4	811.7	931.0	985.3	…	…	…
	General government				16.6	15.4	15.9	31.8	46.0	…	…	…
	Monetary authorities				2.9	1.5	0.4	24.5	32.7	…	…	…
	Monetary financial institutions				343.3	381.8	409.9	422.3	404.2	…	…	…
	Other sectors				239.6	267.9	288.2	341.9	373.9	…	…	…
	Direct investment debt				96.3	90.7	97.4	110.6	128.5	…	…	…
Net international investment position					-24.7	-5.3	-19.5	-58.4	-67.0	…	…	…
	Foreign assets				1037.3	1137.9	1196.3	1206.8	1386.5	…	…	…
	Foreign liabilities				1062.0	1143.3	1215.8	1265.2	1453.5	…	…	…

Sources: The Central Statistics Office; and Fund staff estimates.

Table 2.

Ireland: Summary of Balance of Payments

								Proj.
					2005	2006	2007	2008	2009	2010	2011	2012
					(In billions of euros)
Current account balance					-5.7	-6.3	-10.1	-9.4	-4.8	-0.4	-0.8	-1.1
	Balance of goods and services				18.9	18.2	18.7	18.4	27.7	32.5	36.2	39.2
			Trade balance		28.2	25.0	19.8	23.8	32.6	38.7	41.4	42.7
			Exports of goods		82.7	83.2	84.1	81.5	78.0	86.3	90.6	93.7
			Imports of goods		-54.5	-58.2	-64.3	-57.7	-45.3	-47.6	-49.2	-51.0
		Services balance			-9.3	-6.8	-1.1	-5.4	-5.0	-6.1	-5.1	-3.5
			Credit		48.2	57.1	68.0	69.2	69.3	66.4	68.0	72.6
			Debit		-57.5	-63.9	-69.1	-74.6	-74.3	-72.5	-73.1	-76.2
			Of which: Royalties
				Credit	0.6	0.7	0.9	0.9	1.2	…	…	…
				Debit	-15.5	-17.5	-17.5	-20.6	-23.9	…	…	…
	Income balance				-24.9	-24.0	-27.8	-26.8	-31.6	-32.5	-33.9	-37.0
			Credit		43.4	66.1	84.9	83.8	53.7	57.7	56.3	50.5
			Debit		68.3	90.1	112.7	110.6	85.3	90.1	90.1	87.5
	Current transfers (net)				0.3	-0.5	-1.0	-1.1	-0.9	-0.5	-3.2	-3.3
Capital and financial account balance					-0.2	5.0	12.1	16.1	-3.7	0.4	0.8	1.1
	Capital account balance				0.3	0.2	0.0	0.1	0.0	…	…	…
	Financial account				-0.5	4.8	12.1	16.1	-3.7	…	…	…
		Direct investment			-37.0	-16.6	2.6	-22.9	3.0	…	…	…
		Portfolio investment			52.7	8.1	-7.3	-39.4	29.9	…	…	…
		Other investment			-17.7	13.2	16.7	78.4	-36.8	…	…	…
		Change in reserve assets			1.5	0.1	0.0	-0.1	0.1	…	…	…
Net errors and omissions					5.9	1.3	-2.0	-6.7	8.5	…	…	…
					(In percent of GDP)
	Current account balance				-3.5	-3.6	-5.3	-5.2	-2.9	-0.3	-0.5	-0.6
		Balance on goods and services			11.7	10.3	9.8	10.1	16.9	20.4	22.1	22.9
			Trade balance		17.4	14.2	10.4	13.1	20.0	24.3	25.2	24.9
			Services balance		-5.7	-3.8	-0.6	-3.0	-3.0	-3.9	-3.1	-2.0
		Income balance			-15.3	-13.6	-14.7	-14.7	-19.3	-20.4	-20.6	-21.6
		Current transfers			0.2	-0.3	-0.5	-0.6	-0.6	-0.3	-1.9	-1.9
	Capital and financial account balance				-0.1	2.8	6.4	8.9	-2.3	0.3	0.5	0.6
		Of which:
			Direct investment		-22.8	-9.4	1.4	-12.6	1.9	…	…	…
			Portfolio investment		32.5	4.6	-3.8	-21.6	18.3	…	…	…
			Other investment		-10.9	7.5	8.8	43.1	-22.5	…	…	…
Memorandum items (percent of GDP)
Reserve assets					0.5	0.4	0.3	0.4	0.9	…	…	…
Gross external debt					698.8	757.4	811.7	931.0	985.3	…	…	…
	General government				16.6	15.4	15.9	31.8	46.0	…	…	…
	Monetary authorities				2.9	1.5	0.4	24.5	32.7	…	…	…
	Monetary financial institutions				343.3	381.8	409.9	422.3	404.2	…	…	…
	Other sectors				239.6	267.9	288.2	341.9	373.9	…	…	…
	Direct investment debt				96.3	90.7	97.4	110.6	128.5	…	…	…
Net international investment position					-24.7	-5.3	-19.5	-58.4	-67.0	…	…	…
	Foreign assets				1037.3	1137.9	1196.3	1206.8	1386.5	…	…	…
	Foreign liabilities				1062.0	1143.3	1215.8	1265.2	1453.5	…	…	…

Sources: The Central Statistics Office; and Fund staff estimates.

Table 3.

Ireland: General Government Finances

(In percent of GDP)

Sources: Department of Finance; and staff estimates.

^{^2/}Net debt is defined as gross debt minus the value of the National Pensions Reserve Fund, the Social Insurance Fund, and cash balances.

Table 3.

Ireland: General Government Finances

(In percent of GDP)

			Actual					Staff Projections ^1/
			2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Current balance			5.1	6.5	4.7	-1.1	-7.6	-8.1	-7.6	-5.1	-3.8	-2.4	-1.4
Current revenue, of which:			33.7	35.3	34.6	32.9	32.5	33.2	33.6	35.1	35.5	35.6	35.7
	Tax revenue (including taxes on capital)		25.8	27.2	26.2	23.7	21.8	21.1	22.0	23.5	23.9	24.1	24.1
		Income tax	7.1	7.0	7.1	7.2	7.2	7.2	7.9	8.9	8.9	9.0	9.0
		Corporate tax	3.4	3.8	3.4	2.8	2.4	2.0	2.2	2.3	2.3	2.3	2.3
		VAT	7.5	7.7	7.5	7.4	6.5	6.3	6.5	6.6	6.6	6.6	6.5
		Excise duty	3.3	3.2	3.2	3.0	2.9	2.8	2.8	2.9	3.1	3.2	3.4
		Capital taxes	1.4	1.9	1.8	1.0	0.5	0.4	0.4	0.4	0.4	0.4	0.4
		Stamp duty	1.6	2.1	1.7	0.9	0.6	0.5	0.5	0.5	0.5	0.5	0.5
		Other taxes	1.5	1.5	1.5	1.4	1.8	1.8	1.9	1.9	2.0	2.1	2.1
	Social security receipts		4.5	4.6	4.8	5.1	5.5	5.7	5.7	5.7	5.7	5.7	5.7
	Miscellaneous		3.4	3.5	3.6	4.2	5.2	6.3	5.8	5.8	5.8	5.8	5.8
Current expenditure, of which:			28.5	28.8	29.9	34.1	40.2	41.3	41.2	40.2	39.2	38.1	37.1
	Interest payments		1.0	0.9	0.8	1.0	2.1	2.8	3.3	3.8	4.1	4.4	4.6
	Goods and services		5.2	5.3	5.6	5.8	6.0	5.8	5.7	5.5	5.3	5.1	5.0
	Compensation of employees		9.2	9.3	9.5	11.0	12.1	11.2	10.7	10.2	9.8	9.5	9.4
	Current transfers		12.2	12.4	13.1	15.1	18.6	19.9	19.9	18.9	18.3	17.3	16.3
	Depreciation		0.9	0.9	0.9	1.0	1.4	1.5	1.7	1.8	1.8	1.8	1.8
Primary current expenditure			27.5	27.9	29.0	33.1	38.0	38.5	37.9	36.4	35.2	33.7	32.5
Capital balance			-3.5	-3.6	-4.6	-6.1	-6.7	-3.8	-3.5	-3.5	-3.5	-3.5	-3.4
	Capital receipts (excluding taxes on capital)		0.9	1.1	1.2	1.0	1.0	1.3	1.3	1.3	1.3	1.3	1.3
	Gross capital formation		3.5	3.8	4.8	5.4	4.5	4.6	4.0	4.0	4.0	3.9	3.9
	Capital transfers		0.9	0.9	1.1	1.8	3.2	0.5	0.8	0.9	0.9	0.8	0.8
General government balance			1.6	2.9	0.1	-7.3	-14.3	-11.9	-11.1	-8.6	-7.3	-5.9	-4.8
	Difference with the Stability and Growth Pact targets

Topics

Countries

Series

About

Resources

Abstract

I. Retaining Credibility1

II. The Near-Term Growth and Employment Outlook

A. Output

B. Employment

III. The Strength and Shape of the Recovery

A. An Export-Led Recovery?

B. The Deflationary Drag

C. Macro-Financial Linkages

IV. Financial Sector: Restructuring and Stability

A. Restructuring

B. Financial Stability

V. The Fiscal Outlook and Consolidation Agenda

A. The Outlook

B. The Consolidation Strategy

VI. Staff Appraisal

I. Retaining Credibility¹