Abstract
IMF Country Report No. 23/411
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IMF Country Report No. 23/411
IRELAND
2023 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT
December 2023
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2022 Article IV consultation with Ireland, the following documents have been released and are included in this package:
A Press Release
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on a lapse of time basis, following discussions that ended on November 3, 2023, with the officials of Ireland on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on November 22, 2023.
An Informational Annex prepared by the IMF staff.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2023 International Monetary Fund
Press Release
PR23/446
IMF Executive Board Concludes 2023 Article IV Consultation with Ireland
FOR IMMEDIATE RELEASE
Washington, DC – December 15, 2023: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Ireland.
Ireland’s economy has shown remarkable resilience in the face of consecutive shocks. Following two years of impressive performance, domestic activities slowed but remained solid, supported by continued strength in private consumption. Exports decelerated markedly as the global demand for pharmaceutical and contract manufacturing exports receded from a very high base in 2022. Inflation is easing but remains above the ECB target, and the labor market remains tight. The fiscal position has strengthened considerably on the back of strong tax revenues, but the headline numbers mask some underlying vulnerabilities. The large and complex financial sector has remained resilient so far and will continue to be tested by tighter financial conditions.
The outlook is a soft landing. The expansion of the domestic economy, as measured by Modified Gross National Income, is projected to moderate from a very high base to a still healthy pace at 2½ percent in 2023–24 and converge to its potential at 2¼ percent over the medium term. Inflation is expected to further trend down, reaching 2 percent toward late 2025.
The favorable outlook is clouded by considerable external risks. Further weakening of external demand, a renewed surge in commodity prices, an intensification of Russia’s war in Ukraine or the conflict in Gaza and Israel, and tighter-than-expected global financial conditions pose risks to the outlook. Furthermore, Ireland’s highly open, small economy would likely be shaped by deepening geoeconomic fragmentation in the coming years, and the ongoing changes in international corporate taxation could also alter the country’s fiscal outlook. Domestically, greater supply side constraints could weigh on the economy.
Executive Board Assessment2
In concluding the Article IV consultation with Ireland, Executive Directors endorsed the staff’s appraisal as follows:
The Irish economy has displayed remarkable resilience in the face of recent consecutive shocks and is well-positioned to achieve a soft landing. Growth is expected to moderate to a still solid level in 2023–24, from a very high base, as tighter financial conditions, domestic capacity constraints, and weakening external demand weigh on the economy. Inflation is anticipated to further trend down and reach the target by late 2025. The positive outlook is, however, clouded by considerable external risks. The external position in 2022 is assessed to be moderately stronger than the level implied by fundamentals and desirable policies.
Continued fiscal prudence is warranted to complement monetary tightening in sustaining disinflation and to build adequate buffers for the future. As fiscal policy should avoid adding to aggregate demand amid still elevated inflation, tax revenue overperformance should be saved. The 2023 fiscal stance is appropriate. While the 2024 Budget entails a slightly expansionary policy, it still targets a sizable surplus. With inflation continuing to recede, one-off cost of living measures should be phased out. Given the uncertain and volatile nature of CIT revenues, Ireland’s large exposure to shocks, and future spending pressure, continuing to build buffers is appropriate.
Fiscal policy should support growth-enhancing investment and broaden the tax base. Strengthening public investment efficiency and ensuring timely execution of the capital budget will be critical to deliver on the government’s ambitious goals in the National Development Plan while ensuring value for money. More efforts are warranted to expedite the planning permission process, modernize regulations, and streamline the judicial review process. It is also important to prioritize public investment within an appropriate fiscal stance. There is scope to expand and diversify tax revenues, including by improving the PIT system and simplifying the VAT system.
The authorities’ decision to save part of excess CIT revenues in two savings funds is welcome. With the EU fiscal rules unlikely to be binding for Ireland, the authorities should reflect on an appropriate anchor for their longer-term fiscal framework, beyond the current spending rule for 2022–26, and how the operation of the new savings funds can be integrated within this framework.
Tighter financial conditions, persistent inflation, and rising vulnerabilities in the CRE market with linkages to leveraged non-banks call for continued heightened vigilance of financial stability risks. Intensified supervision of credit and liquidity risks for domestic retail banks should remain and continued close surveillance of large international banks’ vulnerabilities to funding stress is warranted. Staff also encourages continued close monitoring of credit conditions and financial stability risks to assess the need for future adjustment of macroprudential policy settings and welcomes the CBI’s decision to gradually increase the CCyB to 1.5 percent. Mortgage measures should not be used to address broader housing affordability issues.
The authorities’ active efforts to strengthen the oversight of Ireland’s large and complex MBF sector and lead the way internationally in developing and operationalizing a macroprudential framework for non-banks are commendable. The MBF sector’s linkages with the Irish economy have been growing and the authorities have taken welcome measures to fully elucidate and closely monitor the linkages. Closing still significant data gaps about the sector and conducting risk analysis at a granular level remain a priority, which will require intensified regional and international collaboration. The CBI’s introduction of macroprudential measures for Irish-domiciled property funds are essential steps to strengthen the system’s resilience to CRE shocks. The authorities have also taken welcome initiatives to work with regional and international institutions and other countries to develop macro-prudential tools targeting risks from non-banks and should continue these efforts.
Advancing structural reforms would help boost growth and accelerate the green transition. Policies to increase housing density, replace rent caps with targeted housing support for vulnerable households, and improve productivity in the construction sector are important for increasing housing supply and in turn supporting sustainable growth. There is scope to further the MNE sector’s inward linkages to the Irish economy, through promoting supply chain linkages, labor mobility, and innovation cooperation between the two and supporting digitalization and innovation of domestic firms. Progress in carbon emission reductions needs to be accelerated to achieve the country’s ambitious climate commitments.
Title page
IRELAND
STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION
November 22, 2023
KEY ISSUES
Context and outlook. Ireland’s economy has shown remarkable resilience in the face of consecutive shocks. Following two years of impressive performance, growth, as measured by real GNI*, is projected to moderate to a still solid pace at 2½ percent in 2023–24. Inflation is expected to further ease, reaching 2 percent toward late 2025. The fiscal position has strengthened considerably on the back of strong tax revenues, but the headline numbers mask some underlying vulnerabilities. The large and complex financial system has remained resilient so far and will continue to be tested by tighter financial conditions. The positive economic outlook is clouded by considerable external risks.
Fiscal policy. Prudent policy is warranted to support disinflation and avoid adding to aggregate demand, as well as building adequate buffers for future shocks, spending pressures, and potential revenue declines. Given the uncertain and volatile nature of CIT revenues, excess CIT collections should not be used to fund permanent spending. The authorities’ decision to save part of excess CIT revenues in two savings funds is welcome—such funds should be operated within a strong fiscal policy framework. Medium-term fiscal policy should continue to prioritize public investment while ensuring value for money and safeguarding fiscal sustainability. Staff recommends broadening the tax base, further strengthening public investment efficiency, and ensuring timely execution of the capital budget.
Financial policies. Tighter financial conditions, persistent inflation, and rising vulnerabilities in the CRE market with linkages to leveraged non-banks call for continued heightened vigilance of financial stability risks. Intensified supervision of credit and liquidity risk for domestic retail banks should remain and close surveillance of international banks’ vulnerabilities to funding stress is warranted. The authorities’ efforts to develop and operationalize a macroprudential framework for non-banks are commendable. Closely monitoring the growing linkages between the market-based finance sector and the domestic economy and closing data gaps in collaboration with other jurisdictions remain crucial.
Structural reforms. Policies to increase housing density, remove rent controls, and improve productivity in the construction sector are crucial for boosting housing supply. Facilitating domestic SMEs’ links with highly productive multinational enterprises and supporting their digitalization and innovation could help raise SMEs’ productivity. Progress in achieving Ireland’s ambitious climate commitments needs to speed up.
Approved By
Laura Papi (EUR) and Anna Ilyina (SPR)
Discussions were held in Dublin during October 23–November 3, 2023. Mission members included Yan Sun (head), Kamil Dybczak, Karina Garcia, and Yang Yang (all EUR). Gina Fitzgerald and Matthew Day (OED) joined the discussions. Marizielle Evio and Santiago Previde supported the mission. The mission met with Minister for Finance McGrath, Minister for Public Expenditure, National Development Plan Delivery and Reform Donohoe, Governor of the Central Bank of Ireland Makhlouf, senior officials, members of Parliament, labor unions, and private sector representatives.
Contents
CONTEXT
RECENT DEVELOPMENTS
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Fiscal Policy
B. Financial and Macroprudential Policies
C. Structural Policies
FIGURES
1. Economic Developments
2. Inflation Developments
3. Labor Market Developments
4. Fiscal Developments
5. Credit Developments
6. Real Estate Prices
7. Drivers of Housing Affordability
STAFF APPRAISAL
TABLES
1 Selected Economic Indicators, 2019–28
2. Statement of Operations of the General Government, 2019–28
3. Balance of Payments and International Investment Position, 2019–28
4. Monetary Survey, 2017–23
5. Key Financial Indicators of Selected Irish Banks
ANNEXES
I. Implementation of Past IMF Recommendations
II. Implementation of FSAP Key Recommendations
III. Risk Assessment Matrix
IV. External Sector Assessment
V. Sovereign Risk and Debt Sustainability Framework
VI. Macroprudential Policy for Nonbanks—Ireland’s Perspective and Efforts
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
