Economic recovery in medium term ‘highly uncertain’ - IMF

No guarantee of bailout exit even with rigorous adherence to reform programme

A queue for unemployment benefit outside Bishop Street social welfare office in Dublin Photograph: Frank Miller /The Irish Times

A queue for unemployment benefit outside Bishop Street social welfare office in Dublin Photograph: Frank Miller /The Irish Times

Wed, Apr 3, 2013, 18:44

The outlook for economic recovery remains “highly uncertain” over the medium term, a new International Monetary Fund report has warned.

The staff report concludes that the Government has achieved strong policy implementation of the bailout programme so far, and it refers to the fact that market access has markedly improved.

But in a relatively downbeat assessment, the report also flags as as significant hurdles declines in domestic demand, high public and private debt, ongoing problems with profitability and lending in the banking sector.

“Continued weak growth would likely erode confidence and potentially undermine market access as a recovery is critical to putting Ireland’s debt on a downward path.”

The report follows the ninth review of the Government’s four-year bailout programme covering the period up until December 2012.

Like the EU Commission staff report, disclosed by The Irish Times today, the IMF report also expresses concerns about the continuing problems with containing costs in the health sector; the problem of high numbers of long-term unemployed; and the increasing percentage of serious non-performing mortgages and other loans in the banking sector.

Referring to inadequate progress by banks, the IMF staff appraisal is that a sharp improvement is needed in dealing with non-performing loans. This is “critical to strengthen prospects for recovery”, it has stated.

But it is in the overall economic outlook that most concern is expressed. One of the main risks identified include the situation in the financial sector. It also refers to other major risks, including recovery being contingent on improvements in the UK and US as well as the euro area, and a fiscal drag on growth caused by fiscal consolidation.

“These risks to growth have profound adverse implications for the robustness of debt sustainability and for the durability of market access.”

Noting that reductions in debt are contingent on growth, the staff report has warned about the net result of project growth failing to materialise.

It says that if growth is kept in check by half a percent in coming years, “Ireland’s debt ratio would continue to rise, reaching some 134 per cent of GDP by 2018.

“Moreover, higher loan losses associated with rising unemployment and weaker asset prices would generate new capital needs once banks’ buffers are exhausted, which could further raise debt ratios in the medium term.

“Were such a scenario to arise, Ireland’s ability to rely fully on the market to cover its large post-programme financing needs could easily become strained.”

The report says the risks reinforce the importance of creating conditions for sustained strong economic recovery, through strong implementation of all the reforms and savings.

“But even with rigorous implementation of these policies, the required balance sheet adjustment would still leave Ireland vulnerable.”

The report has suggested that those risks could be mitigated by a positive outcome from negotiations over making support from the European Stability Mechanism available for post-hoc capitalisation of Irish banks.

A big question mark is also raised about a full exit from the programme: “Even with continued strong policy implementation a durable exit from drawing on official support cannot be assured without timely and forceful delivery of European pledges,” it concludes.

The staff report rules out general debt relief for distressed mortgages on the basis it would be “unaffordable and ill-targeted as 84 per cent of mortgages [of principal homes] are not in arrears even though many of these are in negative equity”.

It recommends the designation of specialist judges at High Court level to deal with the increased volume of repossession cases, and to allow a speedier and efficient system such as the one in the UK.

When the numbers of unemployed people are added to involuntary part-time workers and those in marginal jobs, the rate of unemployment and underemployment rises to a “staggering 23 per cent”, the report has stated.

It has recommended a doubling of the number of case officers to handle activation and has also pointed to the fact that state training programmes (such as community employment) cost twice as much per person than education programmes.

Like the EU Commission, it has also urged progress in involving the private sector in the provision of employment services.