By Jean Christou
POLITICAL parties have called on the government to clarify what additional measures IMF chief Christine Lagarde was referring to in an interview she gave to Phileleftheros, published on Sunday.
AKEL specifically referred to a question put to Lagarde as to whether Cypriots should expect more taxes and reforms during the duration of the bailout programme over the next two years.
Lagarde responded that Cyprus needed to build on the progress and success achieved during the past year. She said bank balance sheets would need to be further strengthened, and the reform of the debt restructuring framework was a key element in this respect.
“As agreed in the programme from the start, additional fiscal measures will be needed in the medium-term to bring public spending in line with revenues. This will help to reduce debt and ensure that public finances remain sustainable,” she added.
AKEL interpreted this to mean additional revenues through additional taxes. The party said Lagarde had rightly pointed out that unemployment remained a major problem but blamed it on the troika of international lenders, which includes the IMF, for the austerity imposed under the bailout programme, which was “preventing growth”.
Socialist EDEK, commenting on the article said Lagarde had failed to acknowledge that the programme had led the economy into deep recession, fuelling unemployment. Party chief Yiannakis Omirou said she had also advised the further trimming of welfare, the acceleration of privatisations, and the facilitating of bankruptcies “essentially pushing us into a medieval society as we slavishly kowtow to the commands of the troika”.
He said the issue of non-performing loans (NPLs) needed to be settled in order to give businesses a breather but the “troika recipes” only led to one result: “absolute poverty and absolute social misery”.
In the interview Lagarde said that at over 160 per cent of GDP, or half of total bank loans, non-performing loans were a heavy burden on the economy. “As long as banks’ balance sheets are weighed down with these loans, banks cannot concentrate on providing new financing to the economy. And without financing, firms cannot operate, invest, and create new jobs. So dealing with this problem is absolutely essential not just for the banks, but also for firms and workers,” she said.
Lagarde said there were a number of tools that could be used.
“Ultimately, the resolution of non-performing loans comes down to all parties showing good faith. Borrowers are responsible for making good on their obligations. And lenders need to actively and constructively work with viable borrowers who are in real difficulty to find solutions that make repayment feasible,” she added.
Reforms should provide feasible debt repayment solutions for viable borrowers, with the aim of preserving, where possible, the primary residence, said Lagarde. But they also needed to discourage those who can pay from choosing not to do so, “a behaviour that imposes a cost not just on the banks but on everyone”.
In general Lagarde said Cyprus should be congratulated for an impressive programme performance. “Without a doubt, it has been a very difficult year, requiring deep sacrifices by society to adjust to new and challenging circumstances. But the determination of the Cypriot people to deal swiftly with the crisis and move forward contributed greatly to Cyprus being now in a much stronger position than a year ago,” the IMF chief said.
“Yet, unemployment is too high and there are many hardships. The recession has been less severe than projected, but the recovery will only be gradual. The economy is still weighed down by high debt. There is still a lot of work left to do, and the full and timely implementation of reforms will be essential for the return of growth and jobs to Cyprus.”
To ensure growth Cyprus needed to restore the health of the banking system, maintain the health of the public finances and to strengthen institutions to help the public sector meet the needs of the Cypriot people.
There was room to improve the administration of social benefits, and the authorities also needed to redouble their efforts to fight tax evasion and ensure that the tax burden is equally shared while she said privatisations could help reduce public debt and attract much needed foreign investment.
The IMF expects modest economic growth to resume next year, and then to pick up gradually to reach 2 per cent over the long run, based on stronger tourism and business services.
Lagarde said Cyprus should be able to return to capital markets in a sustained manner toward the end of the programme period, provided that market conditions continue to normalise.