The Government has successfully concluded the third quarterly programme review mission with the EU Commission, the ECB and the IMF.
The purpose of the quarterly review mission has been to evaluate performance against the targets set for the third quarter of the programme of financial support for Ireland including fiscal developments, the macroeconomic outlook, progress on commitments in the restructuring of the financial sector and structural reform. The Government is pleased that the staff mission has assessed the Programme to be on track and in their view all targets in the Programme to date have been met. The changes to the MoU are largely related to updates to take account of progress to date.
On welcoming the successful conclusion of the review Minister Noonan stated:
“This review was very much about seeing where we are in relation to the conditions of our programme and its specified targets. I am pleased that the mission has concluded that Ireland is meeting all of the conditions and targets of our programme. We have met the fiscal targets. We have met the banking targets. We have met the structural reform targets. I am also pleased that the external partners have concluded that the Irish Programme is on track and we are making good progress.
I am especially pleased that implementation of some of the financial sector reforms has occurred ahead of schedule, namely:
The legal merger of Allied Irish Bank and EBS Building Society was completed on 1st July 2011, well ahead of the end September 2011 deadline.
The merger of Anglo Irish Bank and Irish Nationwide Building Society to form the Irish Bank Resolution Company (IBRC) was completed on 1st July 2011, well ahead of its scheduled end December 2011 deadline.
A plan to recapitalise Irish Life and Permanent has been finalised again ahead of schedule and the Irish Life subsidiary has been already offered for sale again in advance of the October 2011 deadline.”
Minister Howlin added:
“Good progress is also being made with regards to the programme with the public finances showing welcome signs of stabilisation after a number of very difficult years. We just recently met the mid-year fiscal target set as part of the Programme with tax revenues increasing and public expenditure being managed within the limits set out for the year. Furthermore, the public service paybill is being managed and is on target.
The Comprehensive Review of both current and capital expenditure is underway and it will help to identify expenditure programme savings, efficiency savings and necessary reforms.
This Government is committed to putting Ireland firmly on the road to recovery and since the last review we have announced and implemented the Jobs Initiative which included a reduction in the VAT rate for the key Tourism sector which will help to accelerate growth and job creation. Furthermore significant work has been successfully completed on the recapitalisation and the restructuring of our banking sector to ensure that we have a sound banking system that meets the credit needs of the real economy.”
Both Ministers concluded:
“It is encouraging that the programme is on track and that that the economy returned to growth in the first quarter of this year after three years of contraction. We are however acutely aware that further difficult choices will have to be made in regard to Budget 2012.
The precise make-up of the measures to be introduced will be decided upon later this year and will take account of the Comprehensive Reviews of expenditure and more up-to-date economic and budgetary data. This Government is committed to restoring sustainability to the public finances in a manner that best seeks to protect the economic growth which is beginning to return, and we will do so in an equitable and fair manner.”
Further info:Update on the Irish Economy
Ireland has rigorously implemented fiscal policy in line with the requirements of the excessive deficit procedure. Ireland has shown it can and will meet fiscal targets, and the EU-IMF Programme provides a clear path to sustainability.
This willingness to meet targets is underpinned by the establishment of a new Government with a large parliamentary majority.
The Department of Finance and the Department of Public Expenditure and Reform have continued to ensure tight supervision of expenditure commitments by the line departments, and effective tax collection, to ensure that the primary deficit target in cash and the general government nominal budget deficit as set out in the EU Council Recommendation on excessive deficit procedures are achieved.
The Irish economy is one of the most open in the world – exports were just over 100% of GDP last year compared to a figure of 40% in the Euro area. This means that the Irish economy is much better able to withstand the contractionary effects of necessary budgetary adjustment.
Irish unit labour costs have improved significantly relative to the Euro area as a whole. Irish nominal unit labour costs declined by 4.9% last year, and the Commission anticipate that this positive trend will continue. Price competitiveness has also improved notably in recent years, highlighting that the economy is adjusting quickly.
Ireland has a highly supportive business environment. The World Bank’s annual Doing Business report for 2011, ranks Ireland 9th out of 183 countries in terms of the ease of doing business. This makes Ireland the highest ranked Euro area economy in the Report.
Productivity is a key determinant of long term growth. Irish productivity grew strongly in 2010, when real GDP per employee increased by 3.8%.
The Irish economy is expected to return to growth this year; the EC is forecasting real GDP growth of 0.6% this year and 1.9% in 2012. Over the medium term growth of around 3% is anticipated.
The current account of Ireland’s balance of payments recorded a small surplus last year, and the position is expected to strengthen in the coming years against the backdrop of export led growth. This shows that Ireland as a whole is living within its means, and necessary balance sheet adjustments are taking place
Specific targets met and measures successfully introduced in Q2 2011
Financial Sector Policies
Finalised plans for the recapitalisation of Irish Life and Permanent.
Recapitalisation has been significantly advanced in terms of the total capital need of €24 billion for BOI, AIB, EBS and IL&P.
As part of the recapitalisation process, liability management exercises (LMEs) in respect of the banks' subordinated debt holders have been initiated aiming to reduce the principal by the maximum extent possible.
The possibilities for private placements are being explored.
Independent advisors have validated the methodology used in the estimation of the future losses of Anglo and INBS.
The PLAR 2011 has established a target loan-to-deposit ratio (LDR) of 122.5% which will be achieved by end 2013 for BoI, AIB, EBS and IL&P. Interim targets have been established by the CBI for the intervening period.
The merger of AIB and EBS has been completed.
The strategy for the reorganisation of Irish banking sector announced in the 31 March 2011 is being implemented. As part of this the relevant institutions have put in place arrangements to deal with the deleveraging of the non-core assets.
· A Commission on Credit Unions has been established to design a strategy for the sector. Furthermore an extensive diagnostic and stress test of the small, but locally important, credit union sector.
NAMA is constructively contributing to the restoration of the Irish property market. NAMA has committed to the disposal of 25 percent of assets by end 2013.
Financial Supervision
The Government published the Central Bank and Credit Institutions (Resolution) (No. 2) Bill on 24 May 2011
· The CBI continued to strengthen its capacity to supervise credit institutions by further reinforcing its staffing levels and expertise. On 30th June, the Central Bank published an update to the Banking Supervision Strategy published in 2010. The paper updates on progress made on the actions established last year and in particular details the main areas of focus for the coming period. Key topics include:
Ø Banks Financial Position: Integrity and Transparency;
Ø Central Bank’s Supervisory Culture & Approach;
Ø Supervisory & Regulatory Environment.
In order to address underlying weaknesses that led to the banking crisis The Central Bank have published proposals on provision and disclosure requirements as part of its Banking Strategy to encourage the timely and adequate allocation of provisions.
Structural Reforms
Government has introduced legislation to increase the age at which one qualifies for a Social Welfare pension. Under the National Pension Framework the age at which people will qualify for the Social Welfare pension will be increased to 66 years in 2014, 67 in 2021 and 68 in 2028.
Government extended the voluntary 15-day rule relating to prompt payments to the Health Service Executive, local authorities and state agencies.
The cut in the national minimum wage has been reversed.
Structural Fiscal
Reform
The Irish Fiscal Advisory Council was established on an administrative basis.
Quantitative Targets
As part of the quantitative performance criteria of the April 2011 Technical Memorandum of Understanding (TMU), a target for the end-June 2011 Exchequer primary balance –the Exchequer balance excluding Exchequer debt interest payments – of -€10.9 billion was set.
Under the terms of the TMU, the Exchequer primary balance target is tightened (made more challenging) in the event of any over-performance in Exchequer tax revenues and PRSI receipts compared to the TMU estimate.
At end-June, Exchequer tax revenues and PRSI receipts amounted to a combined €19.3 billion, some €0.8 billion above the TMU estimate. The end-June Exchequer primary balance target was therefore adjusted to -€10.1 billion.
Excluding Exchequer debt interest payments of €2.4 billion to end-June, the actual Exchequer primary balance at end-June was -€8.4 billion meaning this target was met.
The end-June Central Government net debt target was also met.