Thursday 30 October 2014

IMF warns Government's €2bn cuts are not enough

Published 20/12/2013 | 02:30

Ajai Chopra from the IMF

THE Government is wrong to claim that cuts of €2bn will be enough to hit crucial EU targets, the IMF has warned.

The Washington-based body said the Government would need cuts and tax hikes worth €2.4bn next October to bring the deficit below 3pc of GDP by 2015.

The last report from the IMF once again highlights the differences between the Government's stance and the views of most outside observers on the prospects for the Irish economy.

The IMF added that there needed to be a continued focus on reforms on health, education and welfare.

It also pointed out that the level of distressed mortgages remained "unacceptably high", with bad loans making up 26.5pc of all loans.

The IMF's Ajai Chopra, the former Ireland mission chief, said much remains to be done. "Importantly, there's still a large overhang of debt that needs to be worked out," he said.

"Households' debts amount to almost 200pc of disposable income. Sovereign debt is also still high -- we project it to peak at about 124pc of GDP in 2013.

"Despite the progress in recapitalising and stabilising the banking system, banks are not yet supporting the economy with adequate lending.

"Non-performing loans are still high and progress in dealing with these impaired assets has been slow," Mr Chopra added.

WEAK

"And bank profitability remains weak. Work needs to continue to address these impediments to sustained recovery."

The IMF revised its projections for GDP growth this year down to 0.3pc, from 0.6pc at the eleventh review. This is broadly in line with the forecast from the Department of Finance of 0.2pc growth.

It expects GDP to rise to 1.7pc next year -- slightly less than the 2pc estimate from the department.

The body sees domestic demand contracting 0.2pc this year, led by a 0.6pc decline in private spending, before increasing by 0.4pc next year and 1pc in 2015.

Exports are expected to grow just 0.5pc year-on-year owing to the weak first half of the year.

Growth will accelerate to 2.5pc in 2015 led by improvements in the external environment, less drag from austerity measures, and a gradual revival of lending.

The IMF warned that high long-term unemployment, if left unaddressed, could depress growth for years.

The Washington-based lender said bad loans make up 26.5pc of bank loans, led by commercial property loans accounting for 41pc, home loans at 34pc and business and SME loans at 19pc.

It said an examination of options to ease the cost to the banks of loss-making tracker mortgages identified significant challenges.

It said options included the potential to pool loans indexed to policy rates into government-guaranteed assets backed by security structures for repurchase.

The IMF also warned that full implementation of Budget 2014 would be needed to achieve the targets this year, with the main risk coming from possible weaker-than-expected domestic demand.

Irish Independent

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