By George Psyllides
FINANCE Minister Harris Georgiades said on Tuesday that significant relaxations to capital controls could be expected in the coming week as the island surpassed the targets set in the bailout adjustment programme and its banking sector was stabilising.
“I want to inform you that another review procedure by the troika (of international lenders) has been completed with success,” Georgiades told reporters at lunchtime.
The minister said the island’s battered banking sector was in the stage of stabilisation as he announced that significant relaxations to capital controls imposed in March last year should be expected in the coming week.
He did not elaborate on what those relaxations would be.
Cyprus’ banks pushed the country towards default when they sought help from the cash-strapped government after losing billions to Greece.
Depositors were subsequently forced to pay to recapitalise the bank, a process known as a ‘bail-in’, and capital controls were imposed – a new development in the eurozone’s long debt crisis.
Existing controls mean cash withdrawals are capped at €300 a day, breaking time deposits is prohibited, cheques cannot be instantly cashed and large cash transfers are vetted.
Earlier on Tuesday, a senior European Commission source said Cyprus had met all its fiscal targets with a considerable margin – the first time a bailed out country has done so – suggesting a much better than anticipated starting point for the current year.
“Cyprus is clearly outperforming on the targets that have been set at the beginning of the programme. I can also say that that is quite unusual in programme countries,” the commission official said. “It is not the general experience that we have and we’ve had before. Ireland is the example that targets were met, but on the fiscal side I do not recall having seen actually targets being outperformed. That is I think very encouraging,” the source said.
However, delays were observed in implementing the adjustment programme, the main one being approval of the legislation on privatisations, a condition for the next tranche (fourth) of assistance of some €236 million.
“The agreement with the authorities is that this will be done before the next disbursement, towards the end of this month,” the source said. “While a lot has been done the key challenge is not to lose momentum and to continue to implement meticulously. This is extremely important in the end also for rebuilding the credibility of Cyprus.”
Lenders consider privatisations very important as they could attract foreign investment and inject much-needed cash to the economy.
The source said it was wrong to believe the money raised from privatisations was going to finance the adjustment programme.
Georgiades said the bill defined the procedure and not the substance.
Issues that concerned workers, the extent of denationalisation, and other parameters like the regulatory framework, will be dealt with in the coming months, the minister said.
Despite the signs of stabilisation, the banking sector still faced significant challenges.
The most important one was the high levels of non-performing loans (NPLs).
Lenders said NPLs were high but anticipated and in line with projections.
To facilitate the clean-up of banks’ balance sheets and the reduction of private sector indebtedness – both of which are needed to restore credit and sustainable growth – an appropriate debt-restructuring framework is necessary.
Authorities needed to reform the insolvency legislation to offer balanced incentives that can prevent strategic defaults while providing solutions for voluntary debt restructuring for viable borrowers.
The troika said it was important to provide banks with the tools that would encourage borrowers to repay their loans but any legislation should also include sufficient safeguards as regards primary residence.
The outlook remained challenging.
Cyprus’ output in 2013 is estimated to have contracted by about 6.0 per cent in real terms, almost two percentage points better than forecasted at the time of the last review.
Private consumption contracted, although by less than expected, while tourism and professional services have proven resilient, the lenders said.
Output is projected to contract by 4.8 per cent in 2014, with domestic demand weighed down by the need for an adjustment of private and public sector debt from currently high levels.
“A return to positive but modest growth of around 1 per cent is expected in 2015, led by non-financial services. Nonetheless, risks to the outlook are substantial,” the troika said.
By George Psyllides