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IMF: outlook remains difficult for Cyprus

The IMF is interested in having a long-term sustainable economy after a possible solution

By Staff Reporter

Overcoming the legacies of the financial crisis is still challenging for Cyprus, and the outlook remains difficult, the International Monetary Fund (IMF) said on Wednesday.

It said that on October 20, 2014, the IMF’s Executive Board had concluded the Article IV consultation with Cyprus, and concluded that the government had made considerable progress in addressing the crisis.

However it said output was expected to decline this year by a further 3.2 per cent before recovering modestly next year.

“The private and public sectors are heavily indebted. The banking sector remains vulnerable given high and rising non-performing loans and tight funding conditions, with external payment restrictions still needed to protect financial stability,” the IMF said.

“Achieving a durable economic recovery will critically depend on maintaining the reform momentum, which requires overcoming recent delays in programme implementation,” the IMF said.

It said the Cypriot authorities had taken unprecedented measures upfront to resolve and recapitalise weak systemic banks at no fiscal cost and adopted a three-year economic-adjustment programme aiming to secure financial stability and fiscal sustainability.

The programme is supported by international financial assistance of about €10 billion, of which about €1 billion is provided by the IMF under the Extended Fund Facility arrangement, and €9 billion by the European Stability Mechanism. About €5.75 billion has already been disbursed under the program by the IMF and the ESM.

“In the context of their adjustment programme, the authorities have restructured and recapitalised the financial sector while preserving fiscal sustainability, removed domestic payment restrictions imposed at the height of the crisis, consolidated the public finances, and initiated structural reforms. These achievements helped Cyprus re-access international capital markets earlier this year,“  the IMF said.

The IMF Executive directors commended the authorities’ strong efforts to address the recent economic and financial crisis, including measures to recapitalise and restructure the banking sector, liberalise domestic-payment flows, consolidate the public finances, and initiate structural reforms.

However they agreed that Cyprus’ macroeconomic situation continued to be difficult, and full and timely implementation of the adjustment programme supported by the IMF’s Extended Fund Facility remained critical for a durable recovery.

The directors stressed that addressing the high level of non-performing loans to help revive credit and support growth should be a priority. Acknowledging progress in establishing bank internal debt-restructuring units, they highlighted the need for an effective and fair foreclosure regime, complemented by reforms of the legal-insolvency framework that facilitate debt restructuring and preserve the payment culture.

The IMF directors welcomed the recapitalisation of the financial sector in a manner consistent with maintaining fiscal sustainability, including the recent market recapitalisation of the largest bank. Looking ahead, they called for capital buffers in line with the outcome of the European Central Bank’s comprehensive assessment and for further efforts to restructure banks and the cooperative sector. Directors also supported plans to strengthen bank supervision and regulation in the transition to the pan-European Single Supervisory Mechanism and steps to enhance the implementation of the anti money-laundering framework.

The IMF directors called for prudent management of external-payment restrictions to safeguard financial stability and agreed that their relaxation should be gradual and transparent. In this context, they underscored the importance of normalising bank funding and liquidity and noted that Eurosystem support remains essential.

They also encouraged the authorities to privatise state-owned enterprises and develop a strategy to boost competitiveness and potential growth.

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