IMF says keep €2bn budget target to ‘protect credibility’

Weak banking and low inflation among dangers to recovery, says report

International Monetary Fund managing director Christine Lagarde: her organisation says pressure needs to be maintained on the banks to resolve non-performing loans. Photograph: Reuters/Andrew Cowie

International Monetary Fund managing director Christine Lagarde: her organisation says pressure needs to be maintained on the banks to resolve non-performing loans. Photograph: Reuters/Andrew Cowie

Thu, Jun 19, 2014, 01:00

Ireland’s economic recovery is broadening but pressure needs to be maintained on the banks to resolve non-performing loans and restore lending capacity, the International Monetary Fund (IMF) said in a report on Ireland yesterday.

In its first post-bailout monitoring report it noted increases in employment, industrial production, and retail sales, and said tax income in the first five months of the year had been solid.

Despite problems with the health service, the Government remained on track to meet is deficit target for 2014, it said, and gross public debt was expected to ease modestly to a “still high” 121.7 per cent of gross domestic product by year’s end.

‘Anchor’

The executive board of the IMF said it believed the Government should “anchor” next year’s budget on the amount of fiscal adjustment it planned to achieve (€2 billion) rather than the headline deficit in order to “protect hard-won credibility”.

Any additional revenue over and above projections should be used as a “buffer” rather than to reduce taxes or ease off on planned spending restrictions, the head of the IMF’s mission to Ireland, Craig Beaumont, said in a conference call.

He said the Government should evenly spread the adjustments it needed to achieve in order to reach its target of a structurally-balanced budget by 2018, and then stick to these targets.

If economic growth was weaker than expected then achieving the target might take a little longer, but the “main issue” was the steady adjustment.

Government’s goal

The IMF estimates that the budget needs to improve by a cumulative 4.5 per cent of GDP over the 2014 to 2018 period for the Government’s goal to be reached.

Rebuilding the lending capacity of banks was needed to sustain a recovery in domestic demand, and the resolution of the distressed mortgage problem and the workout of impaired commercial real estate loans were key issues.

The IMF said greater engagement with long-term unemployed should take place. The operation of the new €6.8 billion Ireland Strategic Investment Fund involved challenges to ensure it contributed to new economic activity.

External demand, financial markets, low inflation and bank repair shortfalls were all key risks, the report said.

The IMF also believes that, given that Ireland has endured “substantial fiscal adjustment”, political difficulties in achieving further consolidation were another risk.