articles | 16 June 2014

Central Bank anticipates milder economic contraction in 2014

The Cypriot economy may contract in a more milder pace than anticipated, the Central Bank of Cyprus estimates.

In March 2013 the Cypriot government agreed with the EU and the IMF on a €10 billion financial assistance programme featuring an unprecedented haircut on uninsured banking deposits to recapitalise the island’s largest lender, coupled with capital restrictions. As a result the economy contracted by 5.4% of GDP in 2013, which was way less than 8.7% initially projected by Cyprus’ lenders.

For 2014 the Troika (EC, ECB and IMF) revised its projections to a 4.2% contraction from an earlier 4.8%.

The Cypriot programme is reviewed on a quarterly basis with new projections issued after each review. For 2015 the projections revised downwards for growth of 0.4% of GDP from the initial 0.9%.

According to a flash estimate by Cyprus Statistical Service the economy in the first quarter of 2014 contracted by 4%.

“The relatively improved picture projected by recent economic indicators concerning domestic demand in the first months of 2014 constitutes a factor which may suggest an even milder GDP contraction,” the CBC says.

The CBC describes the implementation of the programme as very satisfactory, noting however that there is no room for complacency.

It also notes that the “progress in the banking system in 2013 and in early 2014 is significant and has begun to bear fruit.”

The Bank of Cyprus has been recapitalised with capital generated from the haircut, while the Hellenic Bank achieved its recapitalisation with private sector money.

“As a result of the recapitalisation, the banking sector has significant capital which may be used to absorb possible further shocks,” the CBC adds.

The CBC notes however that “restoring confidence in the banking system demands constant efforts with serious technocratic handling,” adding that ensuring satisfactory liquidity to the economy, the management of non-performing loans and strengthening corporate governance in the banks are issues of priority as well as the necessary preconditions for restoring the banking sector’s credibility.

Source: Famagusta Gazette

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