By Kyriacos Kyriacou-Nicosia
Signs of stabilization are emerging in the banking sector, however, the outlook remains challenging, with rising unemployment, falling credit, and increasing non-performing loans, International Monetary Fund (IMF) says in its latest report on Cyprus. The Eastern Mediterranean island’s government has received a €10 billion bailout from the European Commission, the European Central Bank and the IMF, known as the Troika, and has been subjected to three evaluations so far from its international lenders.
IMF says that the program remains on track and fiscal targets were met with considerable margins, the coop sector was recapitalized, and additional relaxations of payment restrictions are being implemented. Delays in the implementation of structural reforms have recently been overcome.
The report, entitled “Cyprus third International Monetary Fund (IMF) review under the extended arrangement under the extended fund facility and request for modification of performance criteria,” says in its executive summary that while deep, the 2013 recession was not as severe as anticipated.
“The adjustment is occurring through both quantities and prices and signs of stabilization are emerging in the banking sector. However, the outlook remains challenging, with rising unemployment, falling credit, and increasing non-performing loans,” it is noted.
In this context, growth projections remain unchanged, with a deep contraction expected in 2014 and a modest and credit-less recovery taking hold in mid- 2015.
Focus on non-performing loans
According to the report, looking forward, policies will need to focus on dealing with the high level of non-performing loans, further normalizing payment flows, maintaining fiscal prudence, and stepping up the implementation of the ambitious fiscal structural reform agenda.
The authorities also committed to implement as a prior action structural requirements to combat tax evasion. They requested more time to entrust the voting rights of legacy Laiki’s equity stake in Bank of Cyprus (BoC) to an independent entity. It is noted however, that political support for the program is weakening.
Recovery in mid-2015
As regards the macroeconomic framework, it is noted that it has been slightly modified to incorporate recent developments.
Growth projections for 2014 and beyond remain unchanged, and given limited new data for this year, the 2014 growth projection was maintained at – 4.8 percent.
IMF notes that both private consumption and investment are projected to continue to contract, albeit at a lower rate than last year, with the contribution of the foreign balance moderating. The modest recovery, projected to take hold by mid-2015, is expected to be credit-less, led by tourism and other service sectors, which are relatively less indebted, exhibit lower NPLs, and are likely to finance activity and exports through generation of positive cash flow.
As regards unemployment and inflation it is noted that they were revised down modestly. In 2014, the average unemployment rate was revised down to 19.2 percent from 19.8 percent to account for the 2013 outturn and for the deceleration in the rate of increase in recent months. Inflation was lowered to 0.4 percent from 1 percent, reflecting the lower outturn in 2013.
IMF says that public debt sustainability remains highly vulnerable to shocks, while external debt is also a source of vulnerability.