Following the successful
completion of the EU/IMF financial assistance programme at the end of
2013, staff teams from the European Commission and European Central Bank
(ECB), visited Ireland to carry out post-programme surveillance (PPS)
on April 29-2 May. This was coordinated with the IMF's first
post-programme monitoring (PPM) mission. The European Stability
Mechanism also participated in the meetings on aspects related to its
Early Warning System.
Overall, the outlook for Ireland
has continued to improve since the conclusion of the EU/IMF-supported
programme. Against the backdrop of a general decline of sovereign
yields, demand for Irish assets from private investors is high as the
authorities are resuming normal market borrowing. The economic recovery
and the decline in headline budget deficits continue, while structural
and financial sector reforms advance. Nonetheless, high public and
private sector indebtedness weigh on the speed of the recovery,
especially of private consumption.
High-frequency indicators
continue to point towards a gradual recovery in 2014 as external demand
developments support exports and domestic demand stabilises. For example
in February, industrial production increased by 5.3% over the previous
year and about 72,000 jobs have been created since the third quarter of
2012. In the first few months of the year, though still high,
unemployment has proceeded on a steady downward path and is now below
the euro-area average, consumer confidence has climbed and the property
market has stabilized. GDP growth is projected at around 1 3/4% in 2014,
up from -0.3% in 2013.
The general government deficit
narrowed by over one percentage point of GDP in 2013 to 7.2% of GDP,
within the 7.5% limit set under the Excessive Deficit Procedure (EDP).
In 2013, revenue over-performed compared to plans while overall
expenditure was on track; overruns in the health sector were offset by
savings in other areas. The 2014 general government deficit is on track
to stay within the 5.1% EDP ceiling. This projection assumes a rigorous
implementation of the budget to offset health sector overruns, and is
predicated upon a favourable growth and employment outlook. The
authorities remain committed to reducing the general government deficit
to below 3% of GDP in 2015, though specific adjustment measures are
still to be determined and will be communicated in their Draft Budgetary
Plan in October...
Improving market conditions have
resulted in lower bank funding costs and reduced reliance on the
Eurosystem for funding. Bank profitability has improved with the better
operating environment, but it remains challenging as a result of the
high levels of low-yielding tracker mortgages and non-performing loans.
Total mortgage arrears have begun to fall from a high level as the banks
have made progress in meeting their resolution targets, while lending
to the private sector continues to decline. Continued restructuring of
SME loans is critical to boost lending in this sector and support
growth, while the ongoing review of the effectiveness of SME funding and
the creation of non-bank financing sources are also important. This
year, the main banks will undergo a supervisory risk assessment, an
asset quality review and a stress test, in the context of the ECB's euro
area-wide comprehensive assessment.
Structural reforms initiated
under the EU/IMF-supported programme continue to progress. Active labour
market policies focus on improving the delivery of support services in
Intreo offices and on partially contracting out the provision of
services to the long-term unemployed. At the same time, further
education and training reforms aim to reduce significant skills
mismatches and better address the needs of jobseekers and employers.
Continued progress on these initiatives and on the Action Plan for Jobs
will be critical to maintain the positive momentum on job creation and
reduce youth and long-term unemployment. The implementation of the
eHealth strategy is advancing together with the reform of financial
management systems, but further reforms in the health sector are still
needed to improve budget control and tackle overspending in
pharmaceuticals. Water sector reforms are advancing as scheduled and the
introduction of charges for domestic users by the end of 2014 could
have important positive fiscal implications. Reduced legal services
costs and better access to justice, including for businesses, are
expected to be gained pending the timely completion of legal services
regulatory reforms.
The next PPS mission will take place in late 2014.
The mission would like to thank the Irish authorities and the IMF for their constructive and open discussions.