December 15, 2023
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Ireland.
Ireland’s economy has shown remarkable resilience in the face of consecutive shocks. Following two years of impressive performance, domestic activities slowed but remained solid, supported by continued strength in private consumption. Exports decelerated markedly as the global demand for pharmaceutical and contract manufacturing exports receded from a very high base in 2022. Inflation is easing but remains above the ECB target, and the labor market remains tight. The fiscal position has strengthened considerably on the back of strong tax revenues, but the headline numbers mask some underlying vulnerabilities. The large and complex financial sector has remained resilient so far and will continue to be tested by tighter financial conditions.
The outlook is a soft landing. The expansion of the domestic economy, as measured by Modified Gross National Income, is projected to moderate from a very high base to a still healthy pace at 2½ percent in 2023-24 and converge to its potential at 2¼ percent over the medium term. Inflation is expected to further trend down, reaching 2 percent toward late 2025.
The favorable outlook is clouded by considerable external risks . Further weakening of external demand, a renewed surge in commodity prices, an intensification of Russia’s war in Ukraine or the conflict in Gaza and Israel, and tighter-than-expected global financial conditions pose risks to the outlook. Furthermore, Ireland’s highly open, small economy would likely be shaped by deepening geoeconomic fragmentation in the coming years, and the ongoing changes in international corporate taxation could also alter the country’s fiscal outlook. Domestically, greater supply side constraints could weigh on the economy.
Executive Board Assessment [2]
In concluding the Article IV consultation with Ireland, Executive Directors endorsed the staff’s appraisal as follows:
The Irish economy has displayed remarkable resilience in the face of recent consecutive shocks and is well-positioned to achieve a soft landing. Growth is expected to moderate to a still solid level in 2023-24, from a very high base, as tighter financial conditions, domestic capacity constraints, and weakening external demand weigh on the economy. Inflation is anticipated to further trend down and reach the target by late 2025. The positive outlook is, however, clouded by considerable external risks. The external position in 2022 is assessed to be moderately stronger than the level implied by fundamentals and desirable policies.
Continued fiscal prudence is warranted to complement monetary tightening in sustaining disinflation and to build adequate buffers for the future. As fiscal policy should avoid adding to aggregate demand amid still elevated inflation, tax revenue overperformance should be saved. The 2023 fiscal stance is appropriate. While the 2024 Budget entails a slightly expansionary policy, it still targets a sizable surplus. With inflation continuing to recede, one-off cost of living measures should be phased out. Given the uncertain and volatile nature of CIT revenues, Ireland’s large exposure to shocks, and future spending pressure, continuing to build buffers is appropriate.
Fiscal policy should support growth-enhancing investment and broaden the tax base. Strengthening public investment efficiency and ensuring timely execution of the capital budget will be critical to deliver on the government’s ambitious goals in the National Development Plan while ensuring value for money. More efforts are warranted to expedite the planning permission process, modernize regulations, and streamline the judicial review process. It is also important to prioritize public investment within an appropriate fiscal stance. There is scope to expand and diversify tax revenues, including by improving the PIT system and simplifying the VAT system.
The authorities’ decision to save part of excess CIT revenues in two savings funds is welcome. With the EU fiscal rules unlikely to be binding for Ireland, the authorities should reflect on an appropriate anchor for their longer-term fiscal framework, beyond the current spending rule for 2022-26, and how the operation of the new savings funds can be integrated within this framework.
Tighter financial conditions, persistent inflation, and rising vulnerabilities in the CRE market with linkages to leveraged non-banks call for continued heightened vigilance of financial stability risks. Intensified supervision of credit and liquidity risks for domestic retail banks should remain and continued close surveillance of large international banks’ vulnerabilities to funding stress is warranted. Staff also encourages continued close monitoring of credit conditions and financial stability risks to assess the need for future adjustment of macroprudential policy settings and welcomes the CBI’s decision to gradually increase the CCyB to 1.5 percent. Mortgage measures should not be used to address broader housing affordability issues.
The authorities’ active efforts to strengthen the oversight of Ireland’s large and complex MBF sector and lead the way internationally in developing and operationalizing a macroprudential framework for non-banks are commendable. The MBF sector’s linkages with the Irish economy have been growing and the authorities have taken welcome measures to fully elucidate and closely monitor the linkages. Closing still significant data gaps about the sector and conducting risk analysis at a granular level remain a priority, which will require intensified regional and international collaboration. The CBI’s introduction of macroprudential measures for Irish-domiciled property funds are essential steps to strengthen the system’s resilience to CRE shocks. The authorities have also taken welcome initiatives to work with regional and international institutions and other countries to develop macro-prudential tools targeting risks from non-banks and should continue these efforts.
Advancing structural reforms would help boost growth and accelerate the green transition. Policies to increase housing density, replace rent caps with targeted housing support for vulnerable households, and improve productivity in the construction sector are important for increasing housing supply and in turn supporting sustainable growth. There is scope to further the MNE sector’s inward linkages to the Irish economy, through promoting supply chain linkages, labor mobility, and innovation cooperation between the two and supporting digitalization and innovation of domestic firms. Progress in carbon emission reductions needs to be accelerated to achieve the country’s ambitious climate commitments.
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[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.