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Friday 20 April 2018

Final IMF report suggests tougher budget in 2015

Ajai Chopra, Deputy Director of the European Department IMF
Ajai Chopra, Deputy Director of the European Department IMF

THE International Monetary Fund (IMF) has suggested a tougher budget may be needed in 2015 to ensure a crucial EU deficit target is met, as it published its final review of Ireland under the bailout.

This is despite signals from the Government that it could do less than the planned €2bn adjustment.

The Washington-based body said €2.4bn worth of measures would need to be imposed in 2015 in order for the Government to slash the budget deficit - the gap between how much the state spends and takes in through taxes and other revenue - to below 3pc of the value of the economy that year. 

It comes just days after Finance Minister Michael Noonan hinted the Government might be able to meet its targets by doing less than the planned €2bn adjustment.

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

It also pointed out that the level of distressed mortgages remains “unacceptably high”

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.

“So private balance sheet repair and fiscal consolidation both need to continue. Inevitably, these processes take time.

“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.

“And bank profitability remains weak. Work needs to continue to address these

impediments to sustained recovery.”

Craig Beaumont, current mission chief, said the bailout was a “dramatic shock” for Irish society.

“But the programme did avert a sharper deterioration in the economy, which was likely given the deep loss of domestic and external confidence at the end of 2010, especially in the banking system,” he said.

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 trackers 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.

Intensified efforts were needed to reach the goal of largely completing sustainable solutions for mortgage arrears by the end of next year, it said.

“Although the rise in mortgage arrears appears to be slowing, the stock of distressed mortgages remains unacceptably high,” the report said.

It said that while the recent balance sheet assessment on the banks by the Central Bank found banks needed to set money aside for loan losses, it did not imply an immediate need for more capital.

Both Bank of Ireland and AIB are showing steady improvements, but Permanent TSB is not expected to break even after provisioning expenses until 2017, the report stated.

Colm Kelpie

Online Editors

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