Ireland: 2015 Fourth Post-Program Monitoring Discussions—Press Release and Staff Report

Ireland: Fourth Post-Program Monitoring Discussions-Press Release; and Staff Report

Abstract

Ireland: Fourth Post-Program Monitoring Discussions-Press Release; and Staff Report

Outlook and Risks

1. Ireland’s broad-based recovery has supported a welcome reduction in vulnerabilities, but crisis legacies still pose challenges. GDP and domestic demand have rebounded strongly since 2014 on the back of rising employment and incomes, positioning Ireland as the fastest growing economy in the European Union for the second year in a row. While real GDP is now about 5½ percent above its pre-crisis level (also reflecting historical statistical revisions—Box 1), the economy remains vulnerable to shocks—domestic demand has not yet fully recovered; public and private sector debts are elevated; unemployment is still well above pre-crisis levels; and bank repair continues to be a work in progress.

uA01fig01

Real GDP Components and Employment

(Billions of euros, 2-quarter average, seasonally adjusted)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Central Statistics Office; Haver Analytics; and IMF staff calculations.1/ Excluding aircraft and intangibles.2/ Adjusted upward by €28 billion for scaling purposes.
uA01fig02

Real GDP Growth

(Percent, cumulative, 2014q1–2015q2)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Haver; and IMF staff calculations.

2. The economy continues to improve rapidly. Real GDP expanded by 6.7 percent y/y in 2015 H1, with investment rebounding (supported by strong corporate profitability) and consumption growing robustly (helped by higher incomes). The contribution of net external demand was lower, as vigorous export growth to the U.K. and U.S. markets was partly offset by a sharp expansion of service imports (particularly royalties and patents), in line with the strong performance of multinationals. Growth has become more evenly spread, with some domestic sectors (distribution, transport, software and communication) registering double-digit expansions. High frequency indicators suggest the strong momentum continued into Q4. Steady job growth, at 3 percent y/y in Q3, reduced the unemployment rate to 8.9 percent in November. The long-term and youth unemployment rates fell as well, in line with the broad-based nature of the recovery. Yet the participation rate, at about 60 percent, remains 4 percentage points below pre-crisis levels. HICP inflation briefly turned positive in May–August, in part due to sharp increases in housing rents and service prices, before reverting to zero in September and October.

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Contributions to Real GDP Growth

(Percent y/y)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Central Statistics Office; and IMF staff calculations.1/ GDP growth accounts for statistical discrepancy as well.

3. Ireland was largely unaffected by the global financial market volatility last summer. More favorable growth and fiscal prospects together with the ECB’s quantitative easing (QE) have helped keep Irish spreads tight. After a temporary pick up over the summer, 10 year Irish bond yields have converged back toward 1 percent. Citing improved fundamentals, S&P raised its long-term sovereign rating on Ireland by one notch to ‘A+’ in June, although other rating agencies noted the still-high public debt and election-related uncertainty.

uA01fig04

Ten-Year Sovereign Bond Yields

(Basis points)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Source: Bloomberg.

4. Upward pressure on property valuations persists, but prices remain below levels prior to the boom. Housing prices have risen by about 33 percent since their nadir in 2013. Cash purchases have lately accounted for about half of total housing purchases. Nonetheless, the CBI’s announcement in October 2014 of macroprudential measures (in force since February 2015) has been associated with moderating expectations of future price increases, and has thus reduced the speculative demand for housing. Though slower, the rate of housing price appreciation continues, in part reflecting a weak supply response. While still well below pre-boom levels, commercial real estate (CRE) prices are increasing even more strongly, by 25 percent y/y in Q2, with over half of CRE investment this year driven by foreign buyers. As new CRE stock is expected to increase only from 2016 onward, supply shortages have become acute, with vacancy rates for Dublin prime office space now lower than before the crisis.

uA01fig05

Property Prices Growth

(Percent change y/y)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Central Bank of Ireland; Investment Property Databank; OECD; and IMF staff calculations.
uA01fig06

Property Prices

(Index, 1995Q4=100)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Central Bank of Ireland; Investment Property Databank; and OECD.

5. Growth projections have been revised up markedly. Staff raised the GDP growth forecast for 2015–16 given the robust performance so far this year and the positive confidence effects from ECB QE. Medium-term growth was also revised upward to reflect the strong investment momentum (high corporate profitability and still ample corporate deposits), and healthy private consumption (solid employment growth and higher disposable income, including from low oil prices). Growth is projected to decelerate gradually to a potential rate of 2½–3 percent with the output gap expected to turn positive in 2016.

uA01fig07

Real GDP Growth Projections

(Percent change y/y)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Bloomberg; CBI, ESRI; EC; MoF and IMF staff estimates

Macroeconomic Projections, 2013–20

(Percentage change unless indicated otherwise)

article image
Source: Central Statististical Office and IMF staff projections.

Excluding multinational enterprises, see 2015 Article IV Selected Issues Paper.

6. Risks to the outlook are broadly balanced. In the near term, the main risk is of disruptive asset price shifts resulting from a reassessment of global growth prospects, geopolitical developments, or uncertainty around the pace of U.S. monetary policy normalization. Yet the ECB QE, the government’s limited financing needs for 2016, and cash buffers of around 5 percent of GDP would mitigate the impact of the associated tightening of global financial conditions. Conversely, if ECB policy settings were to remain accommodative for a prolonged period of time, this could amplify the Irish business cycle. Risks from an extended period of low euro area growth could hurt confidence, investment, and FDI, but the impact on external demand would be ameliorated to the extent U.S. and U.K. markets remained strong. Although Ireland’s trade with emerging markets is relatively limited, weak growth in key emerging economies could feed in through second-round effects. At home, lower drag from deleveraging and increasing property prices and the associated wealth effect could lift private consumption and investment growth above baseline projections, yet could also generate new vulnerabilities if excessive. The impaired credit channel remains a medium-term risk as the investment recovery will eventually stoke demand for renewed bank lending.

Recent Changes to National Accounts and Balance of Payments Statistics

Historical national accounts and balance of payments data were modified substantially in July 2015. Real GDP growth rates for 2012–14 were revised upward, GDP expenditure components changed for the last 10 years, and the current account balance was reduced. Two factors were behind these revisions:

  • A GDP level-neutral change to the accounting of aircraft purchases by leasing companies. Such purchases are now recorded—in line with ESA 2010—as investment and imports in the country of economic ownership irrespective of where the aircraft is registered for aviation purposes. As a large share of the world’s aviation fleet is managed from Ireland, this affects Ireland’s national accounts (through higher imports and gross fixed capital formation), and its balance of payments (through a lower external trade balance). It also impacts the international investment position (IIP) and financial accounts as the balance sheets of the leasing companies are now included in Ireland’s balance sheet.

  • An upward revision to the service component of private consumption expenditures. This reflected additional information from the tax and insurance statistics.

The revisions change the narrative of Ireland’s economic performance over the past few years. Ireland avoided a second recession in 2012; the ongoing growth recovery has been solidly rooted since 2013; the recovery of domestic demand in 2014 was much stronger; and nominal GDP in 2014 was 3 percent higher than previously reported, lowering the end-2014 debt-to-GDP ratio to 107.6 percent (from 110.7 percent).

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Sources: Central Statistics Office; and IMF staff calculations.

Fiscal Policy

7. In the run up to the general elections in early 2016, Ireland is on track to considerably outperform its 2015 fiscal target, despite a slight easing of the underlying stance. Tax revenues were significantly above profile during January–November, reflecting strong CIT and VAT collections. Total spending remained broadly in line with the original budget through November as overruns in health and social protection were more than offset by a lower than expected interest bill. However, the large tax overperformance allowed a supplementary budget of 0.7 percent of GDP, composed of discretionary spending for social protection and capital projects (0.3 percent of GDP) and overruns (0.4 percent of GDP). Assuming that all the expenditures are executed, staff estimate a modest structural primary easing (0.1 percent of GDP), while the headline deficit projected at 1.9 percent of GDP will significantly outperform the 2.7 percent budget target, allowing exit from the EU Excessive Deficit Procedure. Public debt is set to fall to 97 percent of GDP—lower than anticipated at the time of the 3rd PPM discussion. The headline fiscal outperformance is commendable, but the decline in public debt would have been larger had the full revenue overperformance been used for deficit reduction.

Fiscal Performance, January-November 2015

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Sources: Exchequer Report (November 2015); and IMF staff calculations.

Estimated, excluding transactions with no general government impact.

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Key Tax Heads Outperformance vs. Budget 2015

(Million of euros and percentage 1/)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Department of Finance; and IMF staff calculations.1/ Staff projected cash outperformance of full-year revenue vs. Budget 2015 in millions of euros. Percentages indicate ouperformance vs. each individual tax head projection.
uA01fig10

Gross Voted Expenditures and GDP Growth

(Average annual percent change)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Department of Finance; Central Statistics Office; and IMF staff calculations.

8. Budget 2016 envisages gradual medium-term fiscal consolidation and debt reduction. Based on the expenditure profile set out in the budget, staff project that the overall fiscal deficit will fall to 0.9 percent of GDP in 2016 and continue to decline until reaching a surplus of 0.3 percent of GDP in 2018—broadly in line with the budget projections. The gradual improvement in the structural primary balance—by about 0.4 percent of GDP per year on average until overall structural balance is reached in 2018 (Ireland’s medium-term objective, MTO), as projected by staff—is appropriate given the strength of the recovery and the need to reduce the debt ratio further. Maintaining overall structural balance thereafter would be the minimum required to continue to ensure a prudent pace of debt reduction.1 The assessment of the short-term cyclical position of the economy and the fiscal stance is, nevertheless, inherently complicated for a very open and volatile economy like Ireland (2015 SIP).2 Moreover, while the authorities’ fiscal plans deliver improved debt dynamics and have been characterized as “broadly compliant with the provisions of the Stability and Growth Pact (SGP)” in the European Commission’s assessment of the budget3, public debt is still projected to remain elevated over the medium term. For this reason, revenue outperformance or unanticipated interest savings should be used for debt reduction. The authorities pointed to their conservative revenue projections and stressed that spending will be constrained by the expenditure benchmark. As a result, any revenue outperformance in 2016 cannot be used to fund additional outlays and will be used to further improve the state’s fiscal position. They also emphasized the positive role played by the Spring Economic Statement and National Economic Dialogue in cementing a broad consensus on the size of the fiscal space available ahead of budget preparation.

uA01fig11

General Government Gross Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Source: IMF WEO and staff projections.

Staff Estimates of Fiscal Adjustments 1/

(Percent of GDP unless otherwise indicated)

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Sources: Department of Finance and IMF staff projections.

9. While the pace of the adjustment in 2016 is broadly appropriate, the composition of measures could have been more supportive of potential growth. The fiscal space of €1.5 billion in Budget 2016, stemming in part from recalculation of the expenditure benchmark in April 2015, was equally split between expenditure and revenue measures:4

  • Expenditure measures. The “ Lansdowne Road” wage agreement with public sector unions adds about €300 million to spending in 2016. An additional €470 million was allocated to education and social protection budgets for early education, new teaching posts, higher state pensions, and larger child benefits. Also announced was a 50 cent increase in the minimum hourly wage (an increase of about 6 percent). These measures aim to cement the recovery by supporting job growth and to ensure that the benefits of a growing economy are shared with the broader population after years of sacrifice. In line with advice in the 2015 Article IV consultation, staff argued that better targeting could help protect the most vulnerable in society at lower cost and produce superior social outcomes while creating more fiscal space for growth-enhancing investment

  • Revenue measures. Key measures remove 42,500 workers from the scope of the universal social charge (USC) by raising the entry threshold, reduce the three lowest USC rates, and change USC brackets for lower- and middle-income earners. These changes aim to lessen the tax burden and encourage labor market participation for low wage earners and women. While supporting in principle the reduction in distortionary taxes, staff noted that the impact of USC changes appears regressive, with half of the benefit accruing to households with incomes above €70,000 (about twice the median wage in Ireland). Staff also emphasized the risks associated with tax base erosion and argued against further reduction of the USC, which has played an essential role in restoring a sustainable revenue base. The authorities indicated that the very progressive nature of Ireland’s tax system made virtually any change regressive. However, post Budget 2016 it is estimated that the top 1 percent of income earners will pay 22 percent of the total income tax and USC collected, up from 21 percent in 2015. In addition, the benefits from the tax measures in the budget were capped at an income level of €70,000 such that those with incomes above this level only benefit to the same extent as those with incomes at or below that level. The authorities also pointed out that wage and employment growth would help maintain nominal revenues despite the lower number of workers subject to the USC in 2016. On property taxation, staff expressed concerns about the procyclical implications of the property valuation freeze. The authorities, having regard to the high levels of home ownership, noted that the likely extent of increased charges in the absence of the property valuation deferral would be inconsistent with the objective of relative stability in the tax yield.

uA01fig12

Tax Rates for a Singly Assessed Individual, 2015 1/

(Percent)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Department of Finance; and IMF staff calculations.1/ Annual income subject to income tax, USC, and PRSI.
uA01fig13

Income Earners Exempt from Income Tax and USC

(Thousands of persons and percentage 1/)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Source: Revenue Commissioner Office.1/ Numbers# oNn/Atop of# bNa/rAs represent exempt income earners as share of total.

10. The authorities’ medium-term plans include unallocated fiscal space if the structural balance budget is maintained. The medium-term budget appropriately features more realistic capital spending plans compared to the Stability Program Update. New infrastructure projects in public transportation, health, education, and social housing outlined in the €27 billion Capital Investment Plan for 2016–21 will maintain capital spending at around 2 percent of GDP—still historically low and below the EU average (2.7 percent of GDP). An additional €½ billion per year is planned for current spending in education, social protection, and health to cope with demographic trends. Yet the authorities’ expenditure projections beyond 2016 do not fully incorporate the cost of providing current levels of public services, as highlighted in the Irish Fiscal Advisory Council November 2015 Fiscal Assessment Report. Staff welcomed the increased transparency of the medium-term fiscal projections, but noted the additional potential spending needs to maintain Ireland’s attractiveness for foreign investment, as highlighted in the proceedings of the National Economic Dialogue. Staff also stressed the importance of channeling the remaining fiscal space in the outer years to debt reduction rather than tax cuts. The authorities emphasized that the full public sector investment envelope, including non-exchequer funded projects, will total about 3.4 percent of GNP by end-2020. They also underscored their commitment to rapid debt reduction and their belief that upcoming changes to international taxation standards will confirm Ireland as desirable international investment destination.

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Public Investment and GDP 1/

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: IMF World Economic Outlook; and staff calculations.1/ Axes cross at the EU average.

Financial Sector and Housing Market Policies

11. Economic recovery has supported banking system repair, where more remains to be done. Domestic banks started generating profits in 2014 for the first time since the crisis began and new lending is picking up, albeit from low levels. Asset quality has improved across all categories due to rising household incomes, improving corporate profits, and ongoing resolution of distressed loans. Provision coverage declined slightly as collateral values rose, although these values often remain untested by foreclosures and sales. Nonetheless, loan books continue to contract, profitability remains low and partly driven by provision write backs, and nonperforming loans (NPLs) are still high at about one-fifth of gross loans.5

Irish Banks: Key Financial Indicators 1/

(Percent)

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Source: Central Bank of Ireland; and IMF staff calculations.

Indicators cover the three main domestic banks: Allied Irish Banks, Bank of Ireland, and Permanent TSB.

Figures are not annualized. Table 8 represents comparison with 2014H1.

Annual percent change in end period gross loans and advances.

Excluding nonrecurrent items, as a share of average total assets.

Provision stock to NPLs.

NPLs to sum of provision stock and CT1 capital.

Net loans to customer deposits, in percent

12. Achieving durable bank profitability while maintaining prudent lending practices remains a central challenge. The modest improvement in the aggregate pre-provision profitability of the three main domestic banks in 2015 H1 was driven by improving net interest margins on the back of declining funding costs. Yet, at 0.4 percent of average assets, pre-provision profitability (excluding nonrecurrent items) is still subdued, with prospects for further improvement held back by large tracker mortgage books (half of total mortgage value), modest scope for credit demand in the near term, and administrative costs related to the NPL overhang. The regulatory authorities agreed that achieving durable profitability to support banks’ capacity to generate capital and lend will be a core challenge going forward as further gains from lower funding costs are likely to be limited. They noted, however, that ongoing NPL resolution will provide some relief on costs, while a gradual run off of the tracker mortgage book continues to improve net interest income. Staff cautioned that, as banks may resort to more risky assets to improve returns, supervisors must ensure that banks’ business models appropriately balance profit seeking and risk management, and that loan pricing adequately reflects credit risk and barriers to collateral realization.

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Irish Domestic Banks: Breakdown of Profits 1/

(Billions of euros)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Source: Central Bank of Ireland.1/ Refers to Bank of Ireland, Allied Irish Banks, and Permanent tsb.
uA01fig16

Tracker Mortgages

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Source: Central Bank of Ireland.

13. Faster balance sheet clean up is needed to boost banks’ resilience to shocks and support future credit growth. In the mortgage segment, NPL resolution is complicated by weak cooperation between borrowers and lenders, lengthy legal proceedings, and limited (but increasing) utilization of personal insolvency arrangements. As a result, the stock of mortgage accounts in deep arrears (over 720 days) continues to increase, reaching 55 percent of past-due loans (over 90 days) in mid-2015 from 49 percent at end-2014. About half of the CRE loans are still nonperforming, despite promising trends in restructurings and write downs. The mission emphasized that rising collateral values should not distract workout efforts and stressed that continued supervisory pressure is needed to push forward loan resolution. The authorities noted that the number of accounts in arrears is declining. They pointed out that new court rules imposing more rigorous standards on creditors initiating repossession proceedings, together with new information and support measures aimed at distressed borrowers under the government’s mortgage arrears framework, may shorten the legal process and improve engagement. In addition, new legislation may facilitate the acceleration of the resolution of mortgages in distress by reducing the discharge period from three years to one year. With banks continuing to release provisions as property market conditions improve, staff cautioned that write backs should be based on conservative assumptions and collateral reappraisals.

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Non-Performing Loans 1/

(Percent of gross loans)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Source: Central Bank of Ireland.1/ Refers to Bank of Ireland, Allied Irish Banks, and Permanent tsb.
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Provisions 1/

(Billions of euros)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Source: Central Bank of Ireland.1/ Refers to Bank of Ireland, Allied Irish Banks, and Permanent tsb.

14. The authorities are appropriately focused on ensuring prudent lending standards. The new macroprudential rules seek to support the resilience of banks and households and prevent the reemergence of procyclical dynamics between mortgage lending and housing prices. The authorities noted that it was premature to assess the full impact of the measures as only a fraction of loan drawdowns have been subject to the new rules so far due to lagged effects, but house price expectations have moderated. In staff’s view, periodic impact assessments and recalibration of the measures will be appropriate to ensure their effectiveness. Given that CRE valuations would likely be sensitive to volatility in capital flows, staff welcomed the close supervisory monitoring of CRE financing—where nonbanks play an important role—to identify vulnerabilities, including potential spillovers to the banking system. Continued tracking of loans to CRE buyers and developers would help illuminate supply and demand dynamics going forward. The authorities noted that they did not see a need to intervene at this time, but were keeping the situation under review. Microprudential oversight of the domestic banks also covers CRE portfolios.

uA01fig19

Expectation of House Price Changes

(2015Q3 vs 2014Q3)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Source: Central Bank of Ireland (Macro-Financial Review 2015:II).

15. New measures in housing seek to boost sluggish supply which is exacerbating imbalances in this market. The confluence of still-subdued construction activity and rising demand has resulted in an acute housing shortage—especially in central Dublin—that has fueled prices and rents and stretched affordability. Mindful of the mounting pressures, the government has launched a policy package comprising measures to both boost supply (including streamlined building codes and rebates to developers for qualifying projects) and stabilize rents (also increasing tenant rights and protections). Staff welcomed the increased focus on the housing market, noting that some of the measures would help reduce building costs and could jump start construction activity, particularly of lower-cost homes where profit margins are tighter. The mission, however, warned that the administrative measures on rents could reduce rates of return on investment properties and thus dissuade construction.

uA01fig20

House Completions and Building Cost 1/

(Thousands)

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Sources: Haver Analytics; and IMF staff calcualtions.1/ The Irish Housing Agency estimates that a minimum of 20,000 new homes are required to meet the housing demand in 2015.

16. Disposals of public stakes in the banks would allow accelerated sovereign debt reduction. The recently approved restructuring of the capital base of Allied Irish Banks comprises the conversion of preference shares into ordinary equity, new capital issuance, and a partial repayment (of €1.7 billion) to the state. When implemented, it will enhance capital quality by lifting the bank’s fully loaded common equity tier 1 ratio from about 8 percent of risk weighted assets to over 12 percent, thereby positioning the bank for divestment. The Bank of Ireland also recently announced its plans to redeem the remaining €1.3 billion preference shares (owned by private investors) in January 2016 to allow the bank to renew dividends payments to investors. The authorities indicated that the disposals time line for all public stakes depends on several factors, including maximization of returns to the taxpayer.

Financing and Post-Program Monitoring

17. Ireland’s capacity to repay the Fund is strong on the back of robust economic and fiscal performance, as well as favorable financing terms. Ireland has raised €13 billion in long-term bonds in 2015, while revenue over-performance helped increase the government’s cash balance to €14 billion as of end-October—more than double the outstanding obligations to the Fund and equivalent to over 12 months of projected gross financing needs. The ECB’s QE is proceeding as planned and, if secondary market purchases under the QE continued at the current rate of over €800 million a month, would be broadly equivalent to expected Irish sovereign issuance of long-term bonds over the next 12 months.

18. Medium-term financing needs also appear manageable, and the falling public debt burden reduces risks going forward. Strong growth and fiscal performance have dramatically lowered the baseline public debt path, where further reduction is predicated on the authorities’ continued commitment to fiscal prudence. Gross public debt is now expected to fall below 100 percent of GDP by end-2015—a full two years earlier than anticipated at the time of the 3rd PPM discussion. Ireland’s funding strategy has significantly smoothed medium-term gross financing requirements, and it is likely that the projected hump in 2020 will be dealt with well in advance through debt management operations. Finally, the 2021–23 period—when the remaining liabilities to the IMF fall due—has relatively modest gross financing needs, further lowering risks to the Fund.

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Government Gross Financing Need

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Source: IMF staff calculations and projections.

Staff Appraisal

19. Ireland is enjoying the fastest growth in the European Union, but challenges remain. The recovery accelerated in 2015 and has become more broad-based, with domestic demand overtaking net trade as the dominant driver of growth. Employment expansion is continuing unabated, and the unemployment rate has fallen below 9 percent. Financing conditions remain exceptionally favorable, but upward pressures on house prices are continuing. The outlook is positive and risks are broadly balanced. Yet vulnerabilities are still elevated, particularly public and private debt burdens are high, lending importance to the unfinished task of rebuilding economic resilience.

20. While it is appropriate to share some fruits of the recovery after years of difficult adjustment, fiscal discipline must be maintained to rebuild room for policy maneuver. Strong growth in 2015 has enabled outperformance of the fiscal targets despite an easing of the underlying stance. Public debt is set to fall below 100 percent of GDP by end-2015. The fiscal plans outlined in Budget 2016 and the consolidation pace consistent with reaching a structural balance in 2018 are broadly appropriate. Maintaining structural balance thereafter would be the minimum required to ensure a prudent pace of debt reduction. Yet the budget measures could have avoided tax base erosion, been better targeted and more protective of budget resources. The resulting savings would have created additional room for capital spending and support sustainable growth. Any future fiscal space should be used to accelerate debt reduction, and to rebuild buffers to allow Ireland’s small and open economy to face external shocks.

21. The economic recovery has supported the ongoing banking system repair, where more remains to be done. Achieving durable profitability while accelerating balance sheet cleanup would support future lending growth and boost banks’ resilience to shocks. Provision releases should be based on conservative assumptions and collateral reappraisals. Supervisors must ensure that banks’ business models appropriately balance profit seeking and risk management, and that loan pricing adequately reflects credit risk and barriers to collateral realization. As economic conditions change, periodic impact assessment and recalibration of macroprudential measures will be needed to ensure their effectiveness in enhancing the resilience of banks and households and reducing the likelihood of another cycle of boom and bust.

22. Measures to boost the supply of housing are a welcome step toward addressing the housing market imbalances. They should help reduce building costs and could jump start construction activity, particularly of lower-cost homes where profit margins are tighter. Administrative measures on rents, however, could reduce the return on investment properties and thus dissuade construction.

Figure 1.
Figure 1.

Ireland: Real Sector and Inflation Indicators, 2006–15

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Figure 2.
Figure 2.

Ireland: Household Finance and Property Market Developments, 1995–2015

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Figure 3.
Figure 3.

Ireland: Credit Developments, 2003–15

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Figure 4.
Figure 4.

Ireland: Competitiveness Indicators, 1999–2015

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Figure 5.
Figure 5.

Ireland: Selected Trends in General Government Finances, 2007–20

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Figure 6.
Figure 6.

Ireland: Cyclical Position of the Irish Economy: Stylized Facts, 1997–2015

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Figure 7.
Figure 7.

Ireland: Housing Developments, 1990–2015

Citation: IMF Staff Country Reports 2016, 018; 10.5089/9781513543185.002.A001

Table 1.

Ireland: Selected Economic Indicators, 2010–16

(Annual percentage change unless indicated otherwise)

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Sources: Bloomberg; Central Bank of Ireland; Department of Finance; IFS; and IMF staff projections.

Contribution to growth.

Excludes bank restructuring costs.

Table 2.

Ireland: Medium-Term Scenario, 2010–20

(Annual Percentage change, unless indicated otherwise)

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Sources: Central Statistics Office; Department of Finance; and IMF staff projections.

Contributions to growth.

In percent of GDP.

Excluding one-offs. For 2013, includes exchequer outlays for payments under the ELG scheme in the context of IBRC’s liquidation.

Table 3.

Ireland: General Government Statement of Operation, 2010–20

Table 3. Ireland: General Government Statement of Operations, 2010–20

(Consistent with GFSM 2001; in billions of euros)

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Sources: Department of Finance; and IMF staff projections.

Projections are consistent with the expenditure profile set out in Budget 2016.

Includes stamp duty, capital taxes, property tax and other taxes.

Includes imputed social insurance contributions. The 2011 downward jump in the series reflects the integration of health levy receipts into the universal social charge (now part of income tax).

Includes property income, sales of goods and services, current transfer revenue and capital transfer revenue.

The projected fiscal balances assumes no further improvement once structural balance is reached. The unallocated “fiscal space” reflects room for expenditure increases or revenue cuts relative to staff projections. The fiscal space would be 0.5 percent of GDP lower over 2019–2020 if a neutral fiscal stance (stable structural primary balance) was maintained.

Includes financial sector support costs, license sales, and other non-recurrent revenue and expenditure items that do not affect underlying fiscal position.

In percent of nominal potential GDP. Excludes one-off items.

Debt net of exchequer account, other deposits and non-irish t-bills and other financial assets.

Table 4.

Ireland: Indicators of External and Financial Vulnerability, 2010–14

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Sources: Bloomberg; Central Bank of Ireland; International Financial Statistics; IMF staff calculations and projections.

Adjusted growth rate of credit to households and non-financial corporations.

Data is based on Table A.1 published by Central Bank of Ireland.

Data is based on Table A.6 published by Central Bank of Ireland; includes securitisations.

Includes lending for construction and real estate activities.

Based on IMF’s Financial Soundness Indicators data.

Credit equivalent values. Deposits vis-à-vis Irish and nonresidents.The M3 compiliation methodology has been amended in line with Eurosystem requirements.

Nongovernment credit/nongovernment deposits ratio.

Staff projections for macroeconomic variables and debt.