Ireland: Eleventh Review Under the Extended Arrangement

Policy implementation remains on track but recent weak GDP data point to a slowergrowth recovery. Real GDP declined in the first quarter, reflecting a fall in exports andweak domestic demand. Nonetheless, fiscal results remain on track and sovereign andbank bond yields have risen relatively modestly in response to declining global riskappetite. A range of other economic indicators are more encouraging, suggesting lowerbut still positive growth in 2013, though uncertainty remains. Growth projections for 2014are also lowered given weaker prospects for consumption recovery and for tradingpartner growth.

Maintaining steady fiscal consolidation efforts remains central. Key budgetarymeasures for 2013 have been implemented effectively and broad acceptance ofimportant public sector pay and pension savings has been achieved. Nonetheless,continued firm implementation of Budget 2013 is required to achieve this year's fiscaltargets. Further fiscal consolidation efforts were agreed for 2014–15, with cumulativeefforts in line with program targets.

After undue delay, banks are now beginning the resolution of impaired loans andthis work must press forward to reduce arrears and related uncertainties. Bankshave begun to engage with mortgage borrowers in arrears to propose durable solutions.The establishment of the Insolvency Service and the removal of an unintended hurdle torepossession proceedings are, among other steps, expected to help facilitate loanresolution progress. Nonetheless, the authorities should keep the effectiveness of theresolution framework under review and close supervision of banks' efforts will remainessential. Preparations for balance sheet assessments of the three domestic banks to becompleted in the Fall are advancing as planned.

Employment has begun to pick up but high long-term unemployment remains akey challenge. Resources for the activation of the long-term unemployed should befurther augmented, including through private sector service provision. Facilitating SMEexaminership could aid resolution of SMEs in arrears, supporting their potential to investand create jobs.

Ireland is expected to return to reliance on market financing in 2014, yet furtherEuropean support could make Ireland's recovery and debt sustainability morerobust. Irish banks face weak profitability that hinders their capacity to revive lending.European support to lower banks' market funding costs could help sustain domesticdemand recovery in the medium term, protecting debt sustainability and financialmarket confidence.