IMF Concludes 2022 Article IV Consultation with Ireland

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Ireland on July 1, 2022.

The Irish economy has rebounded strongly from the pandemic. Largely driven by multinational enterprises (MNEs), real GDP grew an impressive 13½ percent in 2021, surpassing its pre-pandemic trend. GNI*, which excludes most of MNEs activities, recovered from its 2.2 percent decline in 2020, growing by an estimated 6 percent in 2021. The fiscal deficit, at 1.9 percent of GDP, surprised on the upside due to buoyant tax revenues and somewhat lower-than-budgeted spending. Headline inflation registered an annual rate of 2.4 percent. The strong economic performance continued through Q1 2022, registering 11 precent y-o-y GDP growth. By May 2022, the unemployment rate fell to 4.7 percent, and the job vacancy rate stood at an all-time high.

The financial sector weathered the pandemic crisis well thanks to high capital buffers and effective policy support. The impact of the pandemic on borrowers’ financial position has started to dissipate, but uncertainty remains. Retail bank profitability is still lower than peers. Two retail banks are exiting but new non-bank lenders are entering the market. New risks have emerged, including from the rapid expansion of non-bank lenders, that have tripled their share of new mortgage lending over last two years (to 13 percent in 2021). Ireland is host to a large market-based finance sector, which requires enhancing risk analysis and reinforcing regulation in collaboration with international partners.

The growth outlook remains positive, notwithstanding global headwinds from the war in Ukraine . Growth is projected to slow from 13.5 percent in 2021 to a still robust 7.5 percent in 2022. This is partly due to the envisaged deceleration of the IT and pharmaceutical sectors from their exceptional 2021 performance and the indirect impact of the war in Ukraine. Several pre-pandemic challenges remain, including housing shortages, infrastructure, social and green investment gaps, and the need to strengthen MNE’s inward linkages to broaden growth and make it more inclusive.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the careful withdrawal of their well-implemented pandemic support and welcomed the exceptionally strong economic recovery. While growth is expected to remain strong, uncertainty around the outlook is high as indirect impacts from the war in Ukraine could be substantial due to rising inflation and weakening global demand. Against this background, Directors encouraged efforts to enhance fiscal sustainability, further strengthen financial sector resilience, and advance structural reforms to address key structural bottlenecks to growth.

Noting the risks to the outlook, Directors recommended maintaining two-way fiscal flexibility that is guided by growth and inflation developments. They welcomed the swift response to mitigate the impact of high energy prices on households and businesses, and considered that any additional measures should be carefully targeted to the most vulnerable. Over the medium term, Directors considered that fiscal policy should support growth-enhancing green investment while keeping public debt on a downward trend to rebuild buffers. In this regard, they supported the authorities’ efforts to continue to enhance public investment quality to ensure value for money. Noting the long-term demographic trends and remaining uncertainty regarding corporate income tax revenues, Directors saw merit in efforts to bolster pension sustainability and further broaden the tax base.

Directors welcomed the findings of the Financial Sector Stability Assessment (FSAP) and endorsed its main recommendations. They noted that Ireland had considerably strengthened financial sector oversight since the last FSAP. While Ireland’s financial sector remains resilient, further efforts are needed to fully address global financial crisis legacies that weigh on retail banks and hinder credit growth. Directors emphasized the need for supervisory capacity to keep pace with the large, complex, and globally interconnected financial sector. They also recommended developing capacity in new areas such as climate, non-bank lending, and fintech. Measures to address remaining data gaps in the non-bank sector and elucidate linkages to the domestic economy were also encouraged. Directors noted the need to extend the macroprudential framework to cover risks from the growing non-bank sector, and also encouraged continued steps to enhance the crisis management regime and strengthen the AML/CFT framework.

Directors concurred that an inclusive and sustainable recovery calls for advancing structural reforms, particularly to increase the inward linkages of multi-national enterprises and mitigate the impact of Brexit on SMEs. They recommended that housing supply policies be further strengthened to improve affordability, and efforts redoubled to support labor upskilling and to enhance the provision of affordable childcare. Directors welcomed the authorities’ green agenda, and recommended that well-phased measures be better specified and implemented to achieve the ambitious quantitative targets.