The International Monetary Fund (IMF) said today Irish economic growth should recover in line with the rest of the world next year but action must be taken to fight inflation and improve competitiveness.
The consultation paper published today following a visit to Ireland by IMF officials in July recommends that the Government avoid raising taxes as tax revenue falls short in the short term.
Instead, a tight rein should be held on spending and the tax base broadened to maintain a balanced budget. Payments under benchmarking must also be closely monitored, it adds.
The IMF said Ireland's growth prospects remain healthy with real GNP projected to grow by 1.5 per cent in 2003 and rebound to about 3 per cent in 2004 with the improvement in the global economy.
But the IMF warned of some risks to the outlook. The nascent global recovery could prove anemic and the euro may stay strong, adversely affecting competitiveness, particularly in domestic industry.
Moreover, a sharp rise in unemployment could pose risks to the housing market and to the financial sector. Given Ireland's prolonged credit boom, the IMF noted that there is a "significant risk" that house prices could be overvalued, although the rise in incomes means negative equity is still some way off.
The IMF stressed that wage growth must moderate to preserve external competitiveness and recommended that benchmarking payments must reflect changes in productivity and economic conditions.
The IMF noted the importance of having "substantive and publicly verifiable evidence of productivity improvements" to support benchmarking pay increases. It suggested the payments be based on private-sector comparators, and that merit and skill differences be taken into account.
Among of the risks highlighted by the IMF is the danger of a bubble in the investment property market as exposure is concentrated among a few a few institutions. The health of the insurance industry also merits "close attention" the IMF added.
The IMF stressed the need for continued supervisory vigilance to ensure the stability of the financial system, and they welcomed the new financial services regulator IFSRA.
The IMF agreed that enhancing competition and lowering regulatory obstacles will be important for sustaining medium-term productivity and income growth. Regulatory reform should be oriented firmly toward serving consumer welfare.