By Nick Mann | 11 September 2012
The success of Ireland’s efforts to reform its banking system and put its public finances on a firm footing depend on support from the rest of the eurozone, the International Monetary Fund said yesterday.
At the end of its latest review of Ireland’s economy, the IMF welcomed the Irish government’s ‘determination’ to reduce its budget deficit and repair its banking system so it can support economic recovery.
‘The authorities have decisively implemented their strategy to reorganise, recapitalise and downsize the banking system, succeeding in restoring strong capital ratios and stabilising deposits,’ it said.
Fiscal consolidation measures mean the country is on track to reduce its deficit from 9.4% to 8.6% of gross domestic product for this year, it added. Irish authorities are also committed to their goal of reducing this further, to below 3% of GDP, by 2015.
But the IMF warned: ‘Prospects for the success of Ireland’s strong policy implementation hinge on recovery across the region and continued progress at the European level to ensure the stability of the euro area.’
It also noted that weaker growth among Ireland’s trading partners and declining domestic demand were affecting the country’s economy. As a result, Ireland will now record 0.4% growth this year, and not 0.5% as forecast by the IMF in June, and then reach 1.4% in 2013, and not the 1.9% earlier forecast.
In light of this, the IMF’s executive board ‘welcomed the June 29 statement by euro area leaders to further improve the sustainability of Ireland’s well-performing programme, which has been instrumental in the country’s recent successful return to the sovereign bond market’.
They also looked forward to the leaders reaching a ‘timely agreement on concrete steps that would break the vicious circle’ between banks and the Irish state.
The IMF also backed temporary ownership of Irish banks by the European Stability Mechanism bailout fund, which it said could reduce funding costs as well as boosting the banks’ profitability and ability to support economic recovery. Plans for closer banking union and supervision across the eurozone are set to be formally announced by the European Commission tomorrow.
‘Significant efforts’ will be needed domestically to meet the deficit reduction targets set for 2015, the IMF said, with a particular emphasis on ‘high quality’ spending and revenue measures that encourage growth and have equitable impacts.
‘Better targeting of spending, including on state pensions, could deliver more immediate savings while protecting the most vulnerable,’ it said. ‘Further reductions in public sector wages might also be needed if wage bill targets cannot be met while protecting public services.’
There was also ‘merit’ in broadening the tax base, including by introducing a value-based property tax, the IMF added.
