Troika Review 20th October

Staff teams from the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) visited Dublin during October 11–20 for the regular quarterly review of the government's economic programme. As envisaged when the mission was scheduled, policy discussions have been concluded with the exception of the specific fiscal measures to be included in Budget 2012, which are being determined by the Government and will be assessed by the three institutions in the coming weeks. Following these decisions, the EC and IMF missions will seek approval for the completion of this review from the European Council and the IMF Executive Board respectively.

Programme implementation continues to be strong. The authorities have completed the key initial phase of the comprehensive financial sector reforms launched in March. The fiscal deficit limit of 10½ percent of GDP in 2011 is expected to be met and important structural reforms are being put in place. These strong policy efforts have underpinned the decline in Irish sovereign spreads in recent months, together with improved EU financing terms.

In a welcome sign of Ireland's strengthened competitiveness, economic growth in the first half of 2011 was stronger than expected. But the slowdown in key trading partners is likely to cool Ireland's export growth. In addition, domestic demand is expected to contract slightly faster than was projected at the time of the previous review. Together, these factors will dampen the economic recovery with real GDP growth rate expected to be about 1 percent in both 2011 and 2012.

The authorities are firmly committed to fiscal consolidation to put the country's debt on a downward path, by bringing the general government deficit to below 3 percent of GDP by 2015. The forthcoming 2012 Budget will make progress along that path by implementing sufficient consolidation to safely limit next year's deficit to no more than 8.6 percent of GDP, striking a balance between debt reduction imperatives and limiting the drag on growth and job creation.

To underscore their commitment to sound fiscal policy, the authorities intent to update the medium-term fiscal consolidation plan in the coming weeks, with the supporting measures to be provided with the 2012 Budget. These measures will be guided by the authorities' Comprehensive Review of Expenditure, enabling savings to be made in a targeted manner rather than through across-the-board cuts. We welcome the establishment of the Irish Fiscal Advisory Council and the release of its first fiscal assessment report.

The key initial phase of the comprehensive financial sector reforms launched last March has been implemented. Recapitalization of the banking sector has been completed at a lower than expected cost to the budget, benefiting from private investor participation and burden-sharing with the holders of subordinated bank debt. Deleveraging of the banking sector is progressing as planned, despite challenging conditions and banks have secured term funding reflecting improved confidence. Further progress in these areas is needed to allow banks to fulfill their essential role in the economy.

The authorities are implementing structural reforms to support job creation and growth. To help reduce unemployment sectoral wage agreements are being prepared, together with a strengthening of activation and training policies. Legislative changes are being introduced to enhance competition in the medical, legal and pharmacy sectors with the view to lowering costs.

The objectives of Ireland's EU-IMF supported programme are to address financial sector weaknesses and to put Ireland's economy on the path of sustainable growth, sound public finances, and job creation, while protecting the poor and most vulnerable. The programme includes loans from the European Union and EU member states amounting to €45.0 billion and a €22.5 billion Extended Fund Facility with the IMF. Ireland's contribution is €17.5 billion. Approval of the conclusion of this review will allow the disbursement of €3.8billion by the IMF and €4.2 billion by the EU. The mission for the next programme review is scheduled for January 2012.