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Ireland : IMF Completes Sixth Review Under the Extended Arrangement with and Approves €1.4 Billion Disbursement

The Executive Board of the International Monetary Fund (IMF) today completed the sixth review of Ireland’s performance under an economic program supported by a three-year, SDR 19.47 billion (about €23.5 billion; or about US$29.5 billion) arrangement under the Extended Fund Facility (EFF), or the equivalent of about 1,548 percent of Ireland’s IMF quota. The completion of the review enables the immediate disbursement of an amount equivalent to SDR 1.191 billion (about €1.4 billion; or about US$1.8 billion), bringing total disbursements under the EFF to SDR 15.027 billion (about €18.2 billion; or about US$22.8 billion).

The arrangement for Ireland, which was approved on December 16, 2010 (see Press Release No. 10/496) is a part of a financing package amounting to €85 billion (about US$106.5 billion) also supported by Ireland’s European partners through the European Financial Stabilization Mechanism and European Financial Stability Facility, and bilateral loans from the United Kingdom, Sweden and Denmark, and Ireland’s own contributions.

Ireland’s policy implementation has continued to be steadfast and ownership of the program remains strong despite the considerable challenges the country is facing. However, as financial tensions in the euro area have resurfaced, Irish sovereign bond spreads have risen in recent months to exceed the level at the outset of the EU-IMF program. Slowing growth in trading partners is expected to dampen Ireland’s export-led recovery, with real GDP projected to expand by ½ percent in 2012, down from 0.7 percent in 2011. At the same time, Ireland’s progress in strengthening the financial system is reflected in the stability of overall level of deposits in the banking system.

After achieving the substantial fiscal consolidation targeted for 2011 with a margin, budget outturns for the first five months of 2012 again were in line with expectations. At the end of May, the cumulative primary deficit was 1.3 percentage points of GDP narrower than in the same period last year, and just below the authorities’ profile for the year. Income tax, VAT and corporation tax continued to over perform, and some 40 percent of the full-year tax revenue target has now been collected. The expenditure overrun seen in earlier months has also moderated, to less than 0.1 percent of GDP.

Financial sector and structural reforms are advancing as envisaged. The authorities remain committed to achieving the 2012 fiscal targets and are developing a package of specific measures to further underpin the 2013–15 consolidation. In the financial sector, the authorities are deepening reform efforts to improve the quality of bank assets and facilitate resolution of household debt distress, and are developing a framework to strengthen the credit union sector. Importantly, the authorities are reviewing and adapting their strategy for growth and job creation in view of the challenging external environment.

Following the Executive Board’s discussion, Mr. David Lipton, First Deputy Managing Director and Acting Chair, said:

“Approaching the half-way mark of its EU/IMF-supported program, Ireland has once more met all program targets. This attests to the Irish authorities’ steadfast policy implementation in the face of headwinds from renewed financial stress in the euro area, which has led to a significant rise in Ireland’s bond spreads.

“The budget remained on track through the first five months of the year for the annual deficit target of 8.6 percent of GDP, and the authorities’ commitment to keep spending within the budget envelope and maintain sound public finances is welcome. If real GDP growth expected for 2012 were to weaken notably, accommodating a potential revenue shortfall would help protect the fragile recovery. The authorities are working to specify by Budget 2013 the measures to underpin the 2013 15 fiscal consolidation, which is important to help Ireland regain market access, as is the further implementation of the authorities’ fiscal institutional reform plans.

“Bolstering growth and job creation is central to the success of the program. Enhanced resources are needed for engaging actively with jobseekers, and care should be taken to avoid unemployment traps in the social payments structure. Reinvesting a portion of state asset disposals will support job creation, but stronger competition enforcement is needed to harness the full growth benefits of these divestments.

“Financial sector reforms must lay the basis for banks to make sound loans in support of the recovery, including by improving their capacity to manage distressed assets. Early preparation of the new personal insolvency framework is needed to address household debt distress while protecting debt service discipline. Restructuring of PTSB will need to be carefully implemented to ensure it is put on a sound footing, including through timely separation of certain legacy and nonperforming assets.

“Ireland’s sustained and forceful fiscal consolidation and policy reforms would be most effective in regaining market access and promoting recovery as part of broader European efforts to stabilize financial markets and strengthen growth in the euro area.”