The Irish economy will shrink by 13.5 per cent between 2008 and 2010 and unemployment will climb to 15.5 per cent next year, according to a bleak assessment by the International Monetary Fund (IMF).
The IMF's annual staff report on Ireland offers a gloomy picture of the country's economic prospects, predicting only a "modestly-paced recovery" after a further contraction next year.
The report identifies bank restructuring, restored competitiveness and fiscal consolidation as critical to ensuring that the economy recovers and acknowledges the Government's actions to address these priorities.
"The proposed National Asset Management Agency is potentially the right mechanism to separate the good from the bad assets. Its success requires a comprehensive and realistic assessment of impaired assets," it says.
Predicting that the budget deficit for 2009 could reach 12 per cent, the report notes the policy dilemma facing the Government as it seeks to reduce the deficit. It calls for further cuts in public service pay and employment and a shift away from universal social welfare benefits towards assistance targeted at the most vulnerable.
"Reducing fiscal deficits is needed to maintain credibility with markets but deepens the economic contraction. Expenditure reduction, as distinct from raising taxes, is the superior approach to fiscal consolidation but, unless carefully managed and prioritized, risks hurting the most vulnerable," it says.
Finance Minister Brian Lenihan welcomed the report as a "balanced and realistic" assessment of the economic challenges facing Ireland. He noted that the IMF acknowledged that the Government has moved in the right direction to address the most important issues - healing the financial sector and improving public finances.
"The IMF correctly identify that we need to improve our competitiveness position. The Government is very aware of this issue and is committed to doing just that. The recent declines in our price levels and Government action in terms of public sector wage rates are significant steps in the ongoing measures to improve our overall competitiveness," Mr Lenihan said.