Credibility hit by split in growth forecasts

THE divergence in growth rate forecasts for the economy between those of the Government and the International Monetary Fund and EU is damaging the nation’s credibility.

Yesterday, the IMF warned that Ireland faced significant risks that could affect its ability to repay €70 billion in aid loans.

The EU is giving Ireland until 2015 to get its budget deficit below the Stability and Growth Pact limit of 3% of GDP, but the IMF said it forecast the deficit to reach 5.1% of GDP by 2014 and 4.8% by 2015, unless more cuts and tax increases are imposed.

The IMF growth forecasts see GNP at -1.5% and GDP at 0.9% in 2011. This compares to Department of Finance GNP at +1.75% and GDP at +1.0% in 2011. The IMF has GDP growth averaging 2.05% over 2011-2014 versus 2.68% for the Department of Finance.

The Government deficit- to-GDP ratio is seen at 5.1% in 2014 by the IMF compared with just 2.8% for the Government.

NCB economist Brian Devine said the IMF forecasts are not baffling and said they are broadly in line with NCB’s forecasts for debt and growth. “The baffling thing is we now have a situation whereby both the EU and IMF, the two parties who are actually providing the funds to Ireland, have released forecasts days after the Department of Finance’s own, which show lower growth rates, higher deficits and a higher debt to GDP ratio,” he said.

“The eventual outcome is highly uncertain at this juncture, but what would help Ireland and its ability to wean the banks off life support at this juncture would be credibility.

“When the people who are supplying you with funds are forecasting the debt-to-GDP ratio peaking at 124.5%, a full 20% higher than the Department of Finance forecasts, this is extremely damaging to credibility,” he argued.

Mr Devine said Ireland is rapidly approaching dangerous levels of debt where the state’s solvency is questionable. “Unfortunately, this unlikely scenario now appears reality,” he warned.

Another worrying aspect of the IMF’s assessment is it perceives the contagion threat from Ireland as significant. “Greece, Portugal and Spain are the most vulnerable to volatility spillovers from an event in Ireland. Other euro-area sovereigns show negative country-specific cross-correlations, while Italy and Belgium appear like borderline cases,” the staff report said.

The IMF warned political risks remained considerable in Ireland as the incoming Government after the election in March or April wants to alter some terms of the bailout, including allowing it to impose losses on some senior bondholders.