IMF Report is downbeat

The Irish Independent is reporting this morning that an imminent report on Ireland from the International Monetary Fund (IMF) is likely to stress the unprecedented nature of the economic challenge the country faces.

Sources say the IMF's projections on the budget deficit and medium-term recovery in the economy may be somewhat gloomier than those of the Government. Official figures put the underlying deficit at around 8pc of output (GDP) this year, but budget projections see a return to growth of more than 3pc in 2011.

The IMF is believed to have calculated that the "structural" deficit could be as much as 10pc of GDP, or €18bn, and that correcting this will require very difficult choices on public spending. It will endorse the widespread view that most of the correction must now come on the spending side, rather than through more tax rises. This would include serious examination of public sector wages.

The IMF's report is likely to repeat previous views that Ireland needs to target its welfare benefits more precisely, in view of the pressures on public spending. Even if it is not spelt out directly, this will be taken to include the universal payment of untaxed child benefit.

The report does not find fault with the Government's approach to the crisis, or its controversial plans to set up the National Asset Management Agency (NAMA) to remove development loans from the banks' balance sheets. But the report does emphasise the amount of effort it will take to solve these problems. The Government's plans see a return to borrowing of less than 3pc of GDP by 2013, from this year's level of around 11pc. Such an ambitious plan will require sustained action on the Government's part, the analysts in Washington say.

On bank rescue, it is likely to emphasise that it is essential that NAMA pays the correct value for the banks' development loans. This has been a political bone of contention, with opposition politicians claiming the Government is planning to bail out the banks and developers, by paying too much for the loans. Taoiseach Brian Cowen has insisted the loans will be valued by experts on an independent basis.

The IMF recognises that the Government has moved quickly on the banking crisis in comparison with some other countries, and that guarantees, re-capitalisation and removal of bad assets must all be part of any re-structuring. Such is the scale of the twin budgetary and banking challenges that the report is expected to state clearly the risks that the Irish economy still faces and the lack of any certainty that the ambitious recovery targets can be met.

Source: Irish Independent 19-Jun-2009