Sunday, September 11, 2011

IMF Lowers its Prediction for Debt-ridden Ireland's Economic Growth

Belfast Telegraph: Noonan Plays Down Budget Fears
Bloomberg: IMF to Cut Irish Growth Forecasts as Outlook Worsens for Trading Partners
The Independent: Enda Kenny Elected Taoiseach
Irish Times: IMF Says Irish Economy to Grow
Reuters UK: IMF Cuts Irish Outlook, Urges More Asset Sales
WSJ: IMF Urges Flexibility for Ireland

Although the International Monetary Fund (IMF) forecasts Ireland’s economy to grow in 2011 for the first time in three years, it lowered its prediction for Ireland’s 2011 growth from 0.6% to 0.4%, and 2012 growth from 1.9% to 1.5%. This unwelcome news is due, in part, to the weakening economies of Ireland’s main trading partners (the Eurozone countries, United States, and United Kingdom), but also to fears that Ireland may suffer negative side effects if Greece has to restructure its debt.

The IMF has been monitoring Ireland since November 2010, when a banking crisis compelled Ireland to ask the IMF and the European Union (EU) for assistance. In exchange for an €85 billion ($114 billion) bailout, Ireland agreed to recapitalize its banks and introduce government austerity measures (a mix of spending cuts and higher taxes). These measures were aimed at reducing Ireland’s budget deficit to less than 3% of gross domestic product (GDP) by 2015.

There have been significant political and economic changes in Ireland since the EU/IMF bailout. In a March 2011 election, Prime Minister Brian Cowen of the Fianna Fail party lost his position to a coalition government led by Enda Kenny of the Fine Gael party. Prime Minister Kenny has continued Ireland’s austerity programs and the IMF reports that Ireland is on target to meet the fund’s 2011 deficit target of 10.5% of GDP. In July, Ireland’s progress in implementing austerity measures led Eurozone leaders to cut the interest rate Ireland pays on its bailout loans. Furthermore, Ireland has seen a rise in its exports (and, therefore, its export revenue), although the IMF cautions the increased exports could be temporary due to recent declines in new export orders.

Even with lower deficits, higher growth rates, and increased exports, the IMF warns that Ireland and the Eurozone still need to do more to restore investors’ confidence in Ireland. The IMF suggests Ireland consider selling €5 billion in assets to raise more funds (potentially the country’s stakes in the airline Aer Lingus and several energy firms), and recommends that Eurozone leaders consider making the European Financial Stabilization Fund (EFSF) more flexible to address future financial risks.

Despite the IMF’s and Eurozone’s attempts to rescue Ireland from its debt crisis, Ireland’s low economic growth and large, persisting deficit are still daunting problems. Finance Minister Michael Noonan recently admitted that future deficit-reductions may require “rather difficult policy decisions.” For a Prime Minister attempting to fix a struggling economy while promising no new taxes or cuts to social welfare programs, these will be difficult policy decisions indeed.

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