On March 23, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the 2015 Article IV consultation with Ireland.¹

Ireland enjoyed strong growth in 2014, at about 5 percent y/y, led by exports and investment. Solid job creation has brought the unemployment rate down to 10½ percent, from a peak of 15 percent three years ago. These positive economic developments drove higher than expected growth in revenues, helping bring the fiscal deficit down to an estimated 3.9 percent of GDP in 2014 despite some spending overruns.

Property markets are bouncing back rapidly, with commercial real estate values up 30.7 percent y/y in 2014, boosted in part by international investment. House prices rose 16.3 percent y/y, as fast as in the boom, helping to improve private balance sheet health. Yet some 14.8 percent of primary dwelling mortgages remain in arrears, with the majority having been in arrears for over two years. Overall nonperforming loans still amount to about one-quarter of total bank loans.

Looking to 2015, Ireland’s growth is expected to remain robust, at about 3½ percent, bolstered by the ECB’s quantitative easing. Consumption is beginning to support activity, aided by the impact of falling energy prices on real incomes. Bank credit has declined for a number of years, yet rising mortgage approvals, together with banks’ improving profitability and ready access to low cost funding, suggest the decline will slow in 2015. The budget is on track for a deficit of 2.7 percent of GDP in 2015, which would enable Ireland to exit the EU’s Excessive Deficit Procedure.

Executive Board Assessment²

Executive Directors welcomed Ireland’s strong economic recovery, the further decline in unemployment, and the strengthened fiscal balances. They noted that medium-term growth prospects appear favorable, though facing headwinds from risks of protracted slow growth in advanced economies, especially the euro area. Directors agreed that the priority is to maintain solid growth, which would require continued prudence in fiscal and financial policies to build policy space, while addressing legacy issues in the banking and housing sectors.

Directors commended the authorities for their steadfast consolidation efforts to reduce the fiscal deficit and public debt ratios. Going forward, they endorsed the goal of balancing the structural budget over the cycle through a phased and steady adjustment, allowing a continued build-up of the fiscal space while supporting the recovery in the near term. This calls for a careful calibration of revenue and expenditure measures. Given the need to create room for essential capital expenditure, Directors encouraged efforts to further broaden the tax base, contain the public wage bill, and improve the targeting of social programs. They also saw merit in saving windfall revenue for debt reduction and in reviewing public investment to ensure its adequacy and high quality in support of potential growth. Directors supported expenditure reforms to deliver public services within a manageable envelope in light of demographic pressures.

Directors recognized the significant progress made in reducing nonperforming loans in recent years. They recommended that the authorities take further decisive steps to resolve cases of prolonged arrears in order to address private debt overhangs and promote credit flows to the economy. Greater utilization of insolvency procedures would be helpful in this regard. Directors also considered it important that banks take early actions to address capital quality issues ahead of new rules on eligible regulatory capital becoming effective, thereby safeguarding their lending capacity. Directors supported exploring nonbank financing options, with appropriate supervision and regulation put in place, while remaining vigilant to fiscal risks from state-sponsored financing vehicles.

Directors stressed that sustaining a robust recovery calls for measures to further enhance the resilience of banks and borrowers to shocks, including property cycles. They welcomed recent steps to strengthen the regulation of residential mortgage lending. Noting the rapid rise in commercial property prices, Directors encouraged close supervision, supported by proactive use of macro-prudential tools, to ensure that bank risk exposures are appropriately contained.

Directors highlighted the medium-term benefits of reforms of the construction sector and residential rental markets in moderating Ireland’s property cycles. They looked forward to the timely implementation of the initiatives set out in Construction 2020, particularly a modernization and streamlining of planning procedures. Directors also supported reforms of the rental property framework to attract investment and professional management to the sector, which, by enhancing the supply and quality of rental property, would facilitate labor mobility and lower unemployment.