“The brisk pace of economic activity is underpinned by ongoing and planned construction projects, and is only partly dented by decelerating private consumption, as households step up loan repayments over time,” the IMF said in a statement on Thursday. “Despite the vigorous upswing, non-performing loans still weigh on banks’ profitability and have prevented significant improvement in households’ and corporations’ financial health. Political and social acceptance of strategic default continue to undermine financial intermediation”.
The IMF said it expects unemployment to fall this year to an average of 9.5% from 11% last year, before dropping to 8% in 2019. The government, which last year produced a fiscal surplus of 1.8% of gross domestic product (GDP) is forecast to generate a 2.1% surplus in both 2018 and 2019. The current account deficit is expected to narrow this year to 5.1% of GDP, from 6.7% last year, and further widen at 7.2% in 2019.
The IMF, which together with the European Commission and the European Central Bank (ECB) participated in the troika of international creditors which supervised Cyprus’ 2013 bailout, said it expects that the government will continue producing fiscal surpluses of up to 4.5% of the economy over the five coming years which will allow public debt fall to 72% by 2013. Government debt fell last year for the first time after the fiscal and banking crisis of 2013 below the 100% mark. In April, the issue of €2.4bn in government bonds in favour of the Cyprus Cooperative Bank increased public debt once more above a year’s economic output.
The “banks’ weak asset quality and insufficient diversification of economic activity are sources of downside risks to this outlook,” it said, adding that the Fund’s directors recommend that the island should amend its insolvency and foreclosure legislation by also introducing “tight eligibility criteria” to avoid moral hazard and contain the cost of a scheme currently being drafted aiming at helping vulnerable borrowers.
The advice comes as the government prepares a stricter foreclosure and insolvency framework to help banks tackle delinquent loans which undermine their capital adequacy. It is part of a three-pronged strategy that also includes the sale of the Co-op’s operations and the introduction of Estia, a scheme that that will help cooperative borrowers affected by the crisis.
The IMF board of directors “noted that Cyprus’ capacity to repay the Fund is expected to be adequate under staff’s baseline scenario but is subject to significant downside risks.”
A year ago, the government repaid close to one-third of the €1bn borrowed from the Fund.
The IMF directors “agreed that sustained strong economic growth and accompanying fiscal primary surpluses would be crucial to achieve a projected rapid decline in the public debt-to-GDP ratio and allow continued access to financial markets on favourable terms. Strong and continued efforts to implement ambitious macroeconomic policies and structural reforms would further reinforce Cyprus’s capacity to repay”.
In this context, directors welcomed the authorities’ willingness to continue post-program engagement with the Fund,” and agreed to extend monitoring through July 31, next year.
They also recommended that Cyprus should not allow public spending to increase above the economy’s medium-term growth, expected to drop to 2.5%.
It suggested instituting a “durable mechanism” that will allow the executive to keep the public wage bill under control. They also advised caution with the fiscal impact of the national healthcare scheme.
A legislative package overhauling human resources in the public sector tabled two years ago by Interior Minister Constantinos Petrides, failed to pass the parliamentary hurdle in late 2016.
“Directors urged the authorities to restart macro-critical structural reforms to help diversify the economy,” the Fund said. “To attract capital into innovative sectors, they recommended focusing efforts on strengthening the enforcement of commercial claims and the efficiency of the courts, as well as pursuing privatization”.
In addition, they advised that Cyprus should avoid excessive concentration in construction, currently aided by investment in real estate made by high net worth individuals acquiring real estate to benefit from the government’s Golden Visa scheme, stressing “the importance of full compliance” with anti-money laundering and counter terrorist financing standards as well as strengthening the island’s legislation against corruption.
Source: Cyprus Mail
