01.05.2015 - Staff from the European Commission, in liaison with staff from the European Central Bank (ECB), visited Ireland to carry out the third post-programme surveillance (PPS) mission from 27 April to 1 May. This was coordinated with the International Monetary Fund's (IMF) third post-programme monitoring (PPM) mission. The European Stability Mechanism (ESM) also participated in the meetings on aspects related to its Early Warning System.
The economic and financial situation continues to strengthen. In 2014, Ireland became the fastest growing EU country as real GDP surged by 4.8%. Growth for the first three quarters of 2014 was primarily driven by net exports, in particular the strong trade links with the US and the UK, and by investment while private consumption started picking up towards the end of the year. The strongest rise in economic activity since 2007 reflects the policy efforts to rebalance the Irish economy. The property market continued to recover, with residential prices rising by 16.3% in 2014. In 2015 and 2016, economic growth is expected to remain buoyant at around 3½ %. Domestic demand is set to gradually replace net exports as the main growth driver. Interest rates on government bonds have fallen to new lows, which helped accelerate the early replacement of most outstanding IMF credits through market issuances.
Public finances improved in 2014. The general government deficit was 4.1% of GDP, well within the ceiling of 5.1% of GDP recommended under the Excessive Deficit Procedure (EDP). In 2014, the public sector debt-to-GDP ratio declined for the first time since 2006 to 109.7% of GDP, down from 123.2 % in 2013. This marked reduction largely reflects the liquidation of the Irish Banking Resolution Corporation (IBRC) along with sustained economic growth and low interest rates.
This week the government presented the 2015 update of the stability programme, which sets out the fiscal strategy for the coming years. For 2015, the update reiterates the government's commitment to correct the excessive deficit in a timely fashion. Beyond 2015, the programme targets a decline of the headline deficit towards a balanced budget in 2018. The deficit target for 2016 incorporates the effect of expansionary measures of EUR 1.2 billion or around 0.6% of GDP.
The European Commission will fully assess the stability programme update with reference to the EU fiscal rules in the coming weeks and and present its conclusions towards end May. From 2016 onwards, the rules of the preventive arm of the Stability and Growth Pact entail that Ireland needs to ensure an adequate progress towards its medium-term objective of a balanced budget in structural terms. In light of the very strong economic recovery, a more ambitious budgetary target for 2016 would accelerate the reduction of the high government debt-to-GDP ratio and help protect against future shocks.
Financial sector repair is advancing well. Two of the three main domestic banks became profitable in 2014. The European Commission recently approved the restructuring plan of Permanent TSB, and the bank announced this week a successful capital raise. This was to cover the capital shortfall identified in the stress test from the ECB's 2014 comprehensive assessment and is an important milestone of the restructuring plan. The successful capital raise bodes well for the expected divestment of other government bank holdings. The new comprehensive supervisory framework under the Single Supervisory Mechanism (SSM) is well established. The recent implementation of the central bank's new mortgage lending rules should underpin financial stability. Non-performing loans (NPLs) have continued to decline, but they still accounted for 23.2% of total loans at end-2014 while the share of commercial NPLs is even higher. Loan restructurings need to accelerate and their sustainability should be continuously monitored. Progress has been made in implementing out of court solutions that facilitate engagement between lenders and borrowers, but issues with the legal system should be properly addressed. The authorities are reviewing the new insolvency and bankruptcy framework as its usage remains moderate.
Structural reforms continue to advance at a variable pace. Despite the authorities' policies to address housing supply constraints, there is a demand overhang, most notably in Dublin. Labour activation reforms are almost finalised and the modernisation of further education and training is progressing. Further efforts are needed to reduce public expenditure on pharmaceuticals and to improve cost effectiveness in the delivery of healthcare especially for hospitals. The authorities are now confident that the enactment of the legal services regulation bill is near. This would be an important first step towards the reduction of legal services costs.
Overall, progress towards rebalancing the Irish economy has continued, also reflected in the strong rebound of economic growth. Nonetheless, the legacies of the crisis demand further continued and determined policy efforts, in particular in the areas of fiscal adjustment, financial sector repair and restructuring.
The next PPS mission will take place in the autumn of 2015.
The mission would like to thank the Irish authorities and the IMF for their constructive and open discussions.