IMF Concludes Article IV Consultation With Ireland

by Mike Godfrey, Tax-News.com, Washington

30 June 2009

The IMF has concluded an Article IV consultation with Ireland. The IMF's recommended priorities were to restore the health of the financial sector, ensure the sustainability of the public finances, and enhance external competitiveness and growth potential over the medium term.

The IMF said that Ireland, after being a 'star performer', had been hit particularly hard by the global economic and financial crisis, reflecting significant vulnerabilities built up during the boom years, amplified by the openness of the economy to global shocks. Locally, according to the IMF, there were imbalances: credit supply accommodated an unsustainable rise in property prices; banks’ exposure to property lending soared while their reliance on wholesale funding intensified; and, as wages climbed rapidly, international competitiveness declined.

Following a decade of close to balance or surplus fiscal positions, the general government deficit was 7% of GDP in 2008 as property-related revenues collapsed. The structural deficit is estimated to have reached 12.5% of GDP in 2008. Gross public debt reached 43% of GDP.

The IMF pointed to the well chosen fiscal measures already taken, including significant and politically difficult cuts in public sector wages, and the ambitious medium-term fiscal consolidation plans. The large structural fiscal deficit, rising public debt coupled with the fiscal burden of financial support to banks, will require a sustained adjustment efforts over several years, according to the IMF, and it acknowledged that the focus should be on expenditure reduction, possibly including a further reduction of the public sector wage bill.

With regard to the sustainability of the planned fiscal consolidation and institutional framework, the IMF would like to see an appropriate fiscal rule and a medium-term expenditure plan that details the intended measures over the full planning horizon. The IMF recommended better targeting of benefits for the vulnerable, broadening the tax base without hampering the restoration of external competitiveness, and further pension reform. A little concern was expressed about the use of resources of the National Pension Reserve Fund for bank recapitalizing purposes.

In respect of the stabilizing of the financial sector and the enhancement of external competitiveness, the IMF were encouraged by the scale and speed of the government's response and agreed with the strategy subject to a few comments on detail. The IMF said that economic growth would hinge on restoration of Ireland’s international competitiveness and a reorientation of the economy toward high-productivity activities. There was no scope for nominal exchange rate adjustment and Ireland’s relatively flexible product and labour markets would be an invaluable asset. The IMF welcomed in this regard the restoration of wage cost competitiveness, acknowledging the progress already underway, and plans on infrastructure and R&D investment.

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