The clear possibility of weaker growth than the Government anticipates could endanger plans to cut its budget deficit, the International Monetary Fund warned today.
Read the IMF statement
The IMF said that so far Ireland has stayed the course with its radical fiscal reform plans but there was also the risk that 'consolidation fatigue' could set in. It made its comments as part of its regular review of Ireland's economy.
'Staying on target is critical to retain the hard-earned credibility,' the IMF said in a statement.
Irish austerity measures introduced over the last year have been praised by investors and other euro zone states. The Government is also planning additional cuts of up to €3 billion in the December Budget.
The IMF said the country needed further consolidation measures of at least 4.5% of GDP to reduce the deficit to 3% of GDP by 2014, as planned.
'If GDP growth outcomes are weaker than those currently foreseen by the authorities - a clear possibility within the current range of scenarios - the additional effort needed may even be greater,' the IMF said.
The IMF delegation spent two weeks in Ireland in mid-May. During the stay, the small delegation met the Finance Minister and public and private sector bodies.
Lenihan says Government committed to task
Finance Minister Brian Lenihan today welcomed the publication of the IMF statement ahead of publication of the full report on the country, due to be published next month.
'I welcome the IMF's recognition of the credibility gained by the Irish authorities in both addressing the fiscal situation and stabilising the banking sector,' Minister Lenihan said.
'I also acknowledge the importance of continuing on the consolidation path. The Government is fully committed to meeting the targets set out in our Stability Programme Update,' he added.
He said the Government has already asked the Oireachtas Joint Committee on Finance and the Public Service to examine the key policy lessons in respect of macro-economic management as set out in the banking report by international experts Claus Regling and Max Watson.
Home-grown problems to continue to haunt us
The IMF delegation concluded that the international community and markets are impressed with all that the country has achieved so far in stabilising the banking sector and controlling public finances.
Although the bond markets do tend to get nervous about lending to us and push up our borrowing costs when they get concerned by other troubled economies, the IMF says that Ireland, in general, has been given space by the markets to pursue its path to recovery.
But the Fund warns that a lot of possible hurdles still lie in the way of the country's recovery. One of these major risks is the fact that the country's banks could potentially require another cash injection if the markets turn on them.
The IMF highlights that the country does not have a lot of money in reserve to deal with these things. It urges the Government to keep a close watch out for these dangers and use high quality communication 'to minimise the risks, sustain political consensus and the confidence of the markets'.
It also warns that many of the home-grown problems that have come out of the boom years will continue to haunt us.
High unemployment, personal indebtedness, inflated property prices, and high-wage expectations and price levels could undermine a recovery even if wages and consumer prices have fallen overall. Those falling wages and prices also make our personal debts appear relatively larger.
It says that efforts to boost the banks' capital reserves are needed to counteract these drag effects. But the banks' same efforts to reduce the ratio of their loans to deposits will constrain new lending and the pace of recovery until the end of next year at the earliest.
The IMF says that NAMA should start planning a disposal programme of the properties it has taken under its control to start normalising the property market.
IMF urges troubled homeowners to be given help
It says that troubled homeowners should be identified, perhaps through the welfare system, and helped to pay their mortgages.
The International Monetary Fund says that when the country does return to growth, it will be modest and that high unemployment will remain for some time to come. The economy should hit annual growth rates of 3.5% by 2015 and by then unemployment will be as high as 9% from its peak of 13.5% this year.
The IMF predicts that export markets will lead the recovery but the spillover effect into the domestic economy will be limited. This is because a lot of exporters use imported goods in their products and a lot of the country's exporters are multinationals that repatriate their profits.
It also says it supports plans to merge the Central Bank and Financial Regulator along with boosting their resources to police the financial sector.
Looking ahead, the IMF says that although the country has pulled together to cut its costs in 2009 and 2010, more money must be saved to reach our target of bringing our budget deficit back within EU limits by 2014.
If forecasts for the country's economic growth are shown to be over-optimistic, and the IMF says there is always a chance that they might be, that Irish people must be prepared for even more brutal spending cuts.
Although the Irish people have been broadly supportive of austerity measures so far, the IMF warns of 'consolidation fatigue'. It says that people should be given fair and specific warnings of what could be coming down the track. The public service must be made more efficient and the country's tax base must be broadened, it adds.
In a clear warning not to repeat the mistakes of old, it says that the opportunity must be taken now to ensure that we get the best possible value out of our public service in the longer term so that in the good times that hopefully are ahead of us, the excesses of the last boom are avoided.
It calls for an independent watchdog to keep an eye on this process.
