European Commission, Statement, Brussels, 17 May 2014:
Staff teams from the European
Commission (EC), European Central Bank (ECB), and the International
Monetary Fund (IMF) visited Nicosia 6-17 May 2014 for the fourth review
of Cyprus's economic programme, which is supported by financial
assistance from the European Stability Mechanism (ESM) and the IMF.
Cyprus’s programme seeks to ensure the recovery of economic activity to
preserve the welfare of the population by restoring financial sector
stability, strengthening public finance sustainability, and adopting
structural reforms to support long-run growth.
Cyprus’s programme remains on
track. Fiscal targets for the first quarter of 2014 were met with a
considerable margin, reflecting better-than-projected revenue
performance and prudent budget execution. Progress has been made with
the recapitalisation and consolidation of the cooperative credit sector,
and banks are advancing with their restructuring plans. This has
allowed for a significant liberalisation of domestic payment
restrictions, in line with the government’s roadmap. The authorities
have also taken steps toward implementing their ambitious structural
reform agenda.
While the recession this year is
expected to be somewhat less severe than anticipated, the outlook
remains challenging. The contraction of output for 2014 has been revised
down to 4.2 percent from 4.8 percent, given the better-than-expected
outturn for 2013 and other recent indicators pointing to gains in
confidence. Unemployment remains very high, and large non-performing
loans are constraining the ability of banks to supply credit to the
economy. As a result, the recovery is now expected to be more subdued
than previously forecast, with growth projected at 0.4 percent in 2015
and gradually improving thereafter, as domestic demand is weighed down
by the need to reduce very high levels of indebtedness.
The first key challenge is to
effectively reduce non-performing loans. This is essential to allow for a
resumption of credit to the private sector to support growth and job
creation. Reforming the legal framework for foreclosure and insolvency
is paramount in order to provide balanced incentives to borrowers and
lenders to negotiate and reach agreement on restructuring of
non-performing loans, while avoiding undue hardship. At the same time,
the supervisory authorities need to intensify their monitoring of banks’
effective action to collect and restructure debt in compliance with the
existing Code of Conduct and arrears management framework. The
authorities are also strengthening supervision and regulation and the
implementation of the Anti Money-Laundering framework.
A second challenge is to
maintain public finances on a sustainable path. The authorities are
making progress in this area, having consistently exceeded programme
fiscal targets. Still, prudent budget execution should be maintained,
given still high macroeconomic uncertainty and downside risks which may
weigh on fiscal outcomes. Over the medium term, the authorities will
need to steadily reduce the fiscal deficit and gradually achieve a
primary fiscal surplus of 4 percent of GDP in order to put public debt
on a sustained downward path.
The third challenge is to
strengthen institutions. The authorities are preparing to launch the
reform of the welfare system, introducing a guaranteed minimum income
scheme to protect vulnerable groups during the current downturn. They
are also making progress with reforming the revenue administration to
increase its effectiveness and efficiency; they need as well to
strengthen collection powers to resolutely address tax evasion and
non-compliance. Along with efforts to improve public financial
management, they will need to take steps to address the management of
fiscal risks. Firm implementation of the government’s privatisation plan
remains essential to increase economic efficiency, attract investment,
and reduce public debt.
Continued full and timely policy implementation remains essential for the success of the programme, given still high risks.
Conclusion of this review is
subject to the approval process of both the EU and the IMF. The matter
is expected to be considered by the Eurogroup, the ESM Board of
Directors, and the Executive Board of the IMF by early July. Their
approval would pave the way for the disbursement of €600 million by the
ESM, and about €86 million by the IMF.
[europa.eu]
17/5/14
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