January 29, 2015
On January 16, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the second Post-Program Monitoring and Ex Post Evaluation of Exceptional Access under the 2010 Extended Arrangement with Ireland.
The second Post-Program Monitoring staff report highlights the strength of Ireland's economic recovery in 2014, with real GDP growing by 4.9 percent year-on-year over the first three quarters of the year and unemployment declining to under 11 percent. Growth is estimated at about 4.7 percent in 2014 and is projected to moderate to about 3 1/2 percent in 2015. Consistent with this robust growth performance, revenues outpaced expectations in 2014. Despite some spending overruns, mostly in the health sector, overall spending was contained owing to interest savings, and the 2014 fiscal deficit is expected to be 3.9 percent of GDP, 0.9 percentage points below the budget target for the year. Gross public debt is expected to ease to 110.7 percent of GDP by end 2014.
Financial market conditions remained exceptionally favorable, with 10 year bond yields reaching a new all-time low of 1.1 percent in January. Market funding costs of Irish banks have trended down, supporting the restoration of banks' profitability. Credit to households and enterprises continued to decline, although mortgage approvals picked up notably. The recovery of the residential and commercial property market is continuing and spreading nationwide. The share of residential mortgages in arrears has declined but remained high at 23.7 percent in Q3. The findings of the ECB's comprehensive assessment were in line with expectations for Irish banks.
The Ex Post Evaluation of Exceptional Access under the 2010 Extended Arrangement (EFF) with Ireland evaluates Ireland's experience under the EFF, approved by the Fund in December 2010 for SDR 19.466 billion. The evaluation notes that program implementation was strong, with establishing strong country ownership, setting realistic targets, and effective communication among the main lessons. The evaluation report also suggests that while the main pillars of the financial sector program were sound, more proactive and stronger supervisory interventions could have strengthened banks' balance sheets and helped resolve problem loans. Bank recapitalization should be limited to banks with a viable medium-term business strategy, and unsecured and non-guaranteed creditors of failed banks should be bailed in, provided a strategy to ring fence potential systemic risks can be put in place. With respect to fiscal policy, the evaluation notes that it needs to be mindful of debt sustainability but also of domestic demand conditions. Finally, the evaluation suggests several lessons related to Fund policies.
The Executive Directors welcomed the further strengthening of the Irish economy and the further declines in unemployment and bond yields. Directors also noted that recent substantial early repayments to the Fund, together with additional planned repayments, would generate significant budgetary savings. Nonetheless, high levels of public and private debt and unemployment remain key vulnerabilities, and Ireland's recovery faces a range of risks, including weak growth in the euro area and potential international financial instability. Going forward, Directors emphasized that fiscal and financial policies and structural reforms should continue to focus on building resilience, sustaining the recovery, and creating jobs.
Directors welcomed the authorities' commitment to fiscal adjustment. Noting that the 2015 budget continues the necessary adjustment, a number of Directors supported a quicker pace of adjustment given strong near-term growth prospects, while others considered that the budget appropriately protects Ireland's recovery. Looking to the medium term, Directors supported a steady structural adjustment at a pace that balances debt reduction and fosters broad-based growth. To achieve the envisaged adjustment, they saw need for a clear strategy for expenditure control over the medium term, while protecting core services and allowing flexibility in reallocating spending. Consideration should be given to implementing revenue measures, if needed.
Directors commended the authorities' efforts to smoothly integrate banking supervision with the Single Supervisory Mechanism and endorsed the more intensive approach to supervision. In view of the large nonperforming loans, Directors supported continued supervisory targets for the resolution of distressed mortgages and encouraged more timely completion of legal proceedings to promote loan restructures. They considered the proposed residential mortgage lending rules as welcome steps to reduce Ireland's macro-financial vulnerabilities.
Directors encouraged stronger efforts to enhance employment and training services to tackle high levels of youth and long-term unemployment. Priority should also be given to addressing factors impeding housing supply.
Directors agreed with the findings of the ex post evaluation of the Extended Fund Facility. They concurred that program implementation by the authorities was strong and that the program achieved its key objectives. In particular, the banking system was stabilized and its size was reduced, and fiscal targets were consistently met despite a depressed external environment and weaker than expected domestic demand. Directors underscored that program success, in particular regaining access to international markets in 2012, benefitted also from actions taken at the wider euro area level.
Among the key lessons drawn from Ireland's experience, Directors particularly recognized the authorities' program ownership. The strong and credible upfront actions helped stabilize the banking sector. In addition, Directors highlighted the merits of setting realistic and well-tailored targets, focusing conditionality on key challenges, and engaging and communicating effectively with stakeholders.
With regard to future program design, Directors noted that more proactive and stronger supervisory intervention could have resolved problem loans more expeditiously and helped banks restore profitability. They also underscored that bank recapitalization should be limited to banks with viable medium-term business strategies. Directors generally agreed that bailing-in creditors of failed banks could limit recapitalization costs, but also stressed that spillover risks needed to be taken into account. Directors agreed that fiscal adjustment should take into account domestic demand conditions as well as debt sustainability and could benefit from a clear and well-defined fiscal anchor.
On Fund policies, Directors noted the importance of addressing shortcomings of the systemic exemption clause of the exceptional access Criterion 2 and looked forward to further work in this area. They noted that securing strong commitments upfront from monetary union authorities would be important when those are critical for program success.
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