|The IMF says following the sharp deceleration of Irish growth and revenues since 2007, the fiscal deficit threatened to reach 15 percent of GDP, which compares with Ireland’s record 17½ percent of GDP in 1978 - - the year following the 1977 general election, that resulted in the first of the two periods of monumental economic mismanagement in the history of the Irish State. The second began in 1997. |
In the Irish General election campaign of 1977, Fianna Fáil front-bencher Gerry Collins, placed an advertisement in his local provincial newspaper in Limerick, which said that his party wasn't offering "pie-in-the-sky promises such as no rates." By the time the newspaper hit the streets, FF had added the abolition of residential rates to its treasure chest of electoral goodies, which had included the scrapping of car tax.
Between 1977 and 1982, the combination of tax cuts and huge spending increases (in the single year 1979, the public service pay bill was increased by 34 percent), resulted in a trebling of the National Debt and the National Debt will treble again, in a similar time-span, compared with 2007.
Irish Economy: The International Monetary Fund (IMF) in its annual report on Ireland that was issued in Washington on Tuesday, said through the end of 2010, Irish banks could face losses of about €35 billion, or about 20 percent of GDP. The economy will shrink by 13.5 percent from 2008 to 2010 - - the largest among advanced economies - - and unemployment will rise to 15.5 percent next year. The Fund says thereafter, as "the present dislocations gradually correct themselves, only a modestly-paced recovery is foreseen. The incipient decline in wages will need to be sustained to help redress Ireland’s cost disadvantage."
The IMF says GDP will expand by just 1 percent in 2011, rising to a low 2.5 percent average rate over the subsequent three years. The Fund estimates that the real exchange rate is currently 15 percent above its long-run average.
With managers of small Irish State agencies earning more than the chairman of the US Federal Reserve and house prices still among the highest in the world, the challenge is clear for those who wish to see it.
The IMF says Ireland's ongoing painful adjustment reflects the unwinding of critical internal imbalances. Since the start of the decade, and especially from 2005 to 2007, easy credit fostered a property bubble, bank exposures to property lending soared while reliance on wholesale bank funding intensified, and international competitiveness was compromised as wages climbed rapidly. On all these dimensions, Ireland had become remarkably vulnerable. Yet, dazzling growth and buoyant public revenues prompted tax reductions and expansion of public expenditures that have proved unsustainable. Various commentators and the IMF in its annual consultations did warn that the seemingly-unstoppable growth masked serious imbalances, including the fragility of public finances.
The Fund said well before the crisis hit, public finances had developed serious structural weaknesses. It says the facts are well known. In the boom years, personal income tax rates were lowered and expenditure grew rapidly (at about the highest pace among OECD economies). Buoyant property-related revenues (stamp duties, VAT, and capital-related taxes) masked the growing structural deficit, which reached 12½ percent of GDP in 2008. To the authorities’ credit, some revenues were set aside in the National Pensions Reserve Fund (NPRF). The NPRF is being used for bank recapitalization needs. This, however, has diluted its primary role as a cushion for long-term obligations related to the aging population, to which it would need to return.
The IMF says the proposed National Asset Management Agency is potentially the right mechanism to separate the good from the bad bank assets. Its success requires a comprehensive and realistic assessment of impaired assets. The authorities’ efforts to press ahead with supportive regulatory and supervisory measures will help manage the current stress and lower the risk of future crises.
The report says the Irish authorities did not formally produce any estimate for aggregate bank losses. It says estimates of losses being faced by banks vary but are likely to be sizeable. On a gross basis, staff’s review of available estimates and methodologies suggests that the losses faced by banks through the end of 2010 could be about €35 billion, or about 20 percent of GDP.
The IMF says a key aspect of NAMA’s success will be the prices at which the assets are purchased. This will determine the extent to which banks’ losses are transferred to the taxpayer. Since price determination is a major challenge, risk-sharing structures could be usefully explored. For example, if sold at a price that is clearly lower than the expected eventual recovery value, bank shareholders could be given a share in the upside. Similarly, the government could be given an opportunity to participate in the upside of the residual healthy bank. The authorities noted that they remained open to a number of refinements, including such upfront risk-sharing structures. Also, the Fund says while there has been some public discussion of a bank-specific ex post “claw back” provision, the authorities are considering an industry-wide levy to recoup any losses suffered by NAMA.
The report says Ireland has lost market share in the global and Eurozone flows of FDI (foreign direct investment). FDI inflows into the Eurozone have tended to fall as a share of world FDI flows.
However, Irish FDI shares have fallen faster. In recent years, Ireland has become the most expensive location in the Eurozone, with the possible exception of Luxembourg. The transformation from a location for low-cost manufacturing to a center for high value added production and services is ongoing. However, the IMF says research shows that FDI flows to a country are highly influenced by recent momentum - - increased global competition for FDI implies that task for Ireland is increasingly harder.
The Fund says Fiscal consolidation has begun - - and requires a sustained effort.
The Irish authorities’ sense of urgency is welcome. The IMF says such, however, has been the collapse of revenues that the 2009 deficit could reach 12 percent of GDP. It says the authorities recognise that the execution of their ambitious consolidation plan will require a continuing commitment to address sensitive expenditures, including the public wage bill and the scope of social welfare programs. The consolidation will be more credible the more tightly it is tied to monitorable goals.
IMF report on Ireland
Video comment from Ashoka Mody, IMF Mission Chief to Ireland
The Minister of Finance, Mr. Brian Lenihan TD, welcomed the IMF report. He said it provides an important endorsement for the policies that the Government has been implementing to deal with the twin crises affecting the economy and the financial sector.
He ignored the devastating indictment of the policies that were pursued since 1997 by his own Fianna Fáil party and the defunct Progressive Democrats.
“I welcome the IMF report published today. This report is both a balanced and realistic assessment of the challenges we face, and also endorses the actions that we are taking. The IMF has highlighted the unprecedented nature of Ireland’s current difficulties, the scale of the correction needed to address them and also identifies the risks that remain to overall economic and fiscal recovery.
In particular, I welcome and note the significance of the fact that the IMF has stated that on the two fronts that matter most – the healing of the financial sector and the correction of the budgetary situation – the Irish Government has moved in the right direction. The Government is continuing to take the right steps to resolve our financial difficulties and to stabilise and restore our economy," Lenihan said.