By George Psyllides
THE CHALLENGE for Cyprus is to continue to fully and timely implement the policies of its bailout adjustment programme, including the important component of privatisations, which are critical for the return of growth, the International Monetary Fund (IMF) mission chief for Cyprus has said.
In a written response to Sunday Mail questions, Delia Velculescu said international lenders expected the economy to “go through an unavoidably deep recession this year and next, with incomes declining and unemployment rising.”
“The challenge looking forward is to continue to implement fully and in a timely manner the policies under the adjustment programme, which are critical to the return of growth,” Velculescu said, otherwise “growth could remain elusive for a longer period of time.”
The IMF official said finalising the recapitalisation and restructuring of the banking sector and ensuring that non-performing bank loans are addressed decisively will be essential to restoring confidence in banks so that capital controls could be removed and credit flows resume to pave the way for economic recovery.
Cyprus recently passed its second review with flying colours, but observers warned of tougher times ahead as the thorny issue of privatisations must be addressed by the end of the year.
The government has expressed its determination to fully implement the programme but it is expected to have a difficult time convincing political parties and unions of the need to privatise public companies.
“Privatisation is an important component of the adjustment programme. Its objectives are not only to help to provide financing to the state over the medium term, but even more importantly to increase the efficiency of the economy as resources are transferred from the state to the private sector, which helps to spur competition for the benefit of the consumer,” Velculescu said.
According to the terms of the bailout, Cyprus must raise some €1.4b from privatisations between 2016 and 2018.
Asked whether lenders would insist on privatisations if Cyprus managed to raise the cash from other sources, Velculescu said any alternative sources of financing needed to be considered carefully to ensure they did not impose an undue cost on current or future generations, such as by increasing not just public but also private debt.
“Privatisation is one such source of debt-free financing, which can have not only financial but also economic benefits, in that it can lead to better services and lower costs for the consumer, while eliminating the need for direct or indirect taxpayer support,” she said.
Velculescu added that lenders were in close contact with Cypriot authorities on assessing how specific modalities could achieve the objectives.
“Privatisation modalities need to be tailored to specific circumstances. For example, monopolies would need to be regulated appropriately, public interests need to be adequately considered, and services can be unbundled to address specific market needs,” the IMF official said. “Ultimately, the success of a privatisation programme depends on how best it achieves the objectives.”
However, many on the island fear that even if the programme is fully implemented, Cyprus will still fall short of its targets and have to impose additional painful measures.
“Should unforeseen developments materialise, which are outside the authorities’ control, these would be taken into account by adapting policies and targets while preserving the programme’s goals to achieve financial stability, debt sustainability, and a return to growth,” Velculescu said.
She said the programme had measures carefully tailored to prevent a vicious cycle of deeper austerity and slower growth with international financial assistance also helping to cover budget shortfalls in the short run.
Additional measures, beyond those already implemented, needed to put public debt on a downward path, were only required in the outer years, as the recovery took hold, she said.
“Still, there is no doubt that the Cypriot population is going through a difficult period, which requires deep sacrifices,” Velculescu said. “The programme aims to ensure that those most vulnerable are protected during the current downturn, including through a comprehensive reform of social welfare which aims to provide adequate assistance to all groups in need. Furthermore, international financial support is there to cushion the adjustment of the economy.”