The IMF indicated that next year it would not seek additional spending cuts even if budgetary targets are not met. “If [economic] growth is lower than projected, the programme does not require spending cuts to offset underperformance of prudent revenue projections, which would otherwise further weaken demand,” it said in relation to 2011.
However, the IMF’s Ajai Chopra said yesterday that based on its new projections, additional budgetary tightening measures would be required, in addition to those the Government has committed to in its four-year plan, if the deficit is to be reduced to 3 per cent of gross domestic product (GDP) by 2015. Its new projections published yesterday put the deficit at 4.8 per cent of GDP in 2015.
According to Mr Chopra, additional measures over the longer term would be necessary because the IMF believes the economy will grow less strongly than the Government expects. This, in turn, will result in larger than anticipated budget deficits.
Mr Chopra was speaking during a conference call with journalists to answer questions about a new report prepared by the IMF as input into its decision to provide Ireland with bailout funding.
On the scope for a new Government to alter the terms of the bailout, he said the IMF had experience of administrations changing while countries received aid.
However, on some of the most contentious issues raised by the Opposition parties, he indicated that change in the bailout terms would not be possible. He made his most emphatic statement to date on not forcing senior bank bondholders to take a “haircut” and said the rate paid by Ireland on IMF loans would not change.
In the report, reform of the banking system is listed as the most urgent issue to be dealt with. Much of the report reiterated the terms of the bailout, set out in late November, but proposals to conduct new stress tests on the banks are fleshed out.
The IMF report noted the external assessments of the banks’ balance sheets will not be carried out by “an audit or consultancy firm that has provided such services to the bank in the last three years”. Speaking from Washington, Mr Chopra said that this was to ensure “a fresh pair of eyes” made the assessments of the banks’ loan books.
The IMF has slashed its growth forecasts for Ireland and now expects the budget deficit and unemployment to be higher for longer. The weaker picture is the result of a larger budget adjustment dampening growth. Although the IMF has not ruled out the possibility of the Government’s more optimistic scenario coming to pass, it believes its own more pessimistic forecast “is subject to downside risks”.
In October, the IMF expected joblessness to peak at 13.5 per cent in 2010 before declining gradually to 9.5 per cent by 2015. It now believes a rate of 13.5 per cent will also be registered in 2011 and that there will be 10.7 per cent unemployment in 2015.
In October it expected GDP to expand by 2.3 per cent next year. It now believes the expansion will be less than half that, at 0.9 per cent, identical to the most recent forecast of the European Commission. This is well below the Government’s target of 1.75 per cent.
For 2012, the IMF has also revised its GDP growth forecast downwards, from 2.4 per cent in October to 1.9 per cent. This, too, is identical to the European Commission’s forecast. The Government expects GDP to expand by 3.25 per cent in 2012. The IMF’s board confirmed on Thursday that it would provide monies up to the agreed €22.5 billion.
In relation to its lending to Ireland it stated “the fund’s liquidity and credit risk exposure is very substantial”.
