Tom Ferris, Economic Consultant, examines Ireland's relationship with the IMF,
following the publishing of their latest report.
The International Monetary Fund (IMF) published its most recent evaluation of the Irish economy last week. In the main, the report was very positive, although a number of challenges were identified and a number of policy changes suggested. Overall, the report—which can be read here—concluded that the bright prospects for the Irish economy were clouded by risk.
IMF Process
How was the evaluation undertaken? A staff team visited Ireland for one week last January, collected economic and financial information, participated in a conference, discussed with officials the country’s economic developments and policies, and met Minister Noonan and Minister Howlin and Patrick Honohan, Central Bank Governor.
On return to headquarters, the staff prepared a report, which forms the basis for discussion by the IMF Executive Board. This process is part of a cycle of evaluations carried out on all member states; this is separate from the IMF monitoring process which has been taking place since Ireland successfully exited the Troika Programme of Assistance in December 2013.
Response of Ministers
The Minister of Finance, Mr Michael Noonan TD, and the Minister for Public Expenditure and Reform, Mr Brendan Howlin TD, produced a joint response to the IMF Report on 25 March. They welcomed the IMF report and stated:
The consultation is an important assessment of the economies of IMF members and we have taken note of their views of our short and medium term prospects. These will be carefully considered in the context of our overall policy development in the medium term.
They gave a commitment to considering the IMF’s recommendations in the context of overall policy development in Ireland in the medium term.1
Some Key Statistics
The IMF reportcontains a myriad of statistics and figures. Just one table is presented here to give a flavour of projections that the IMF has made for the Irish economy. The table projects growth of between 2.5% and 3% in both Gross Domestic Product (GDP) and Gross National Product (GNP) over the next five years. Investment is projected to grow at an average rate of 6%, while private consumption at the lower average rate of 2%. The unemployment rate is projected to decline to 7.3% in 2020, down from 10% in 2015.
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Table: IMF Projections, 2015-2020 |
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|
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
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|
GDP (%) |
3.5 |
3.0 |
2.7 |
2.5 |
2.5 |
2.5 |
|
|
GNP (%) |
2.7 |
2.6 |
2.4 |
2.5 |
2.9 |
2.9 |
|
|
Private consumption (%) |
1.5 |
1.6 |
2.0 |
2.2 |
2.3 |
2.3 |
|
|
Gross Fixed Investment (%) |
9.5 |
7.5 |
6.0 |
5.3 |
5.5 |
5.5 |
|
|
Unemployment (%) |
10.0 |
9.1 |
8.6 |
8.2 |
7.8 |
7.3 |
|
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Source: IMF Estimates, March 2015 |
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Some Key Conclusions
The IMF report acknowledges that Ireland’s economic recovery has been robust. It forecasts that growth will continue this year at 3.5%. The unemployment rate is expected to decline to 10%, down from a peak of 15% three years ago, with long-term unemployment falling, although still unduly high. The report also notes that the health of the private balance sheet is improving and enterprise profitability has risen, yet distressed loans remain high and arrears are increasingly prolonged. Some cautionary notes are introduced in relation to property markets:
• Commercial real estate values are up 30.7% year-on-year in 2014, though they still remain about 30% below pre-boom levels.
• House prices rose 16.3% year-on-year, as fast as the increases during the boom period, though they are still 38% below peak.
The IMF’s priority is ensuring that solid growth and job creation is sustained. Solid growth needs to be maintained to further reduce unemployment while moving towards greater social equity. In that regard, the IMF team made quite a number of recommendations. Six recommendations illustrate the range of policies that the IMF believe need to be addressed:
• Healthcare: “Cost efficiency in healthcare should be further improved by building on existing initiatives: high use of costly acute care should be reduced through expanded primary care and further pharmaceutical savings should be sought”.
• Wider tax base: “The substantial progress since made in broadening the tax base needs to be protected going forward”.
• Public Pay Bill: “Further cost reductions and service delivery improvements through implementation of the Public Service Reform Plan 2014–16 should also be sought”.
• Social Protection: “There is also scope to generate savings while protecting those on low incomes through means-testing of benefits and taxation of universal benefits”.
• Higher education: “Higher education funding reforms are needed to control growth in public spending while protecting low income students, by better targeting college fee subsidies”.
• Effective Investment: “A gradual rise in public investment may be required once the fiscal position is closer to balance, while ensuring the quality of investments through rigorous project assessment”.
Overview
The IMF plays a very useful role in providing external evaluation of how economic policy is being rolled-out in Ireland, while giving advice as to policy changes that can benefit the economy. It also gives the Irish authorities an opportunity to defend their policies. Some of the responses are published in the IMF report. For example, in the case of the tax base, the Irish authorities accept that “… there could be a role for further broadening of the tax base, but they also considered it important to address high marginal income tax rates”.
Overall, the IMF report concludes that the priority for the Irish Government is to ensure that continuing economic growth and job creation is achieved. That will require balancing the budget over the next few years through a phased and steady adjustment. Room should be provided to ensure increased public investment. That requires rigorous assessment of the quality of capital projects to ensure any investment made avoids growth bottlenecks. Getting these balances right will be a difficult and challenging task for the Irish Government.