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Cyprus

Economy shows signs of stability in the longer term

By George Psyllides

CYPRUS’ macroeconomic outlook shows signs of stabilisation despite the unfavourable external environment, according to a European Commission technical document.

The country report said recession was gradually losing momentum and real gross domestic product (GDP) contracted by 2.4 per cent in 2014 – significantly less than the 5.4 per cent contraction the previous year.

“In 2015 and 2016, growth is forecast to resume only gradually as private domestic demand slowly picks up, supported by lower energy prices,” the paper said.

“Negative risks remain, however, notably due to a potentially more extended period of tight credit supply and a worse than-expected deterioration of the economic situation in Russia.”

The need for fiscal consolidation remained and there was also “an urgent need to step up the momentum of structural reforms, notably in the areas of public administration, privatisation, healthcare, liberalisation of regulated professions, and energy, if substantial progress is to be achieved by the end of the programme in March 2016.”

Although there has been progress on various fronts, compliance with programme conditionality in some fiscal and structural reforms is lagging behind schedule.

Progress has been made, notably with the adoption of the welfare reform, the adoption of the medium term debt management strategy and risk assessment of government guarantees, and on international tax cooperation, which could reverse the negative rating by the Global Forum.

Measures to facilitate employment and to mitigate the negative social effects of unemployment have been partially implemented, albeit at a slow pace.

The banking sector has gradually stabilised but the “excessively” high level of non performing loans had to be addressed.

This “will be key in restoring bank intermediation functions and thereby supporting investment growth.”

Bank restructuring of these loans was very slow, the document said, adding that two important measures that could help in this regard – foreclosures and insolvency framework – have not yet been implemented.

“These two legal frameworks are needed to create incentives for both debtors and creditors to agree on debt restructuring.”

Despite the volatile deposit outflows, bank liquidity buffers improved continuously since early 2015.

Deposit outflows started to stabilise in the fourth quarter of 2014, and in particular after the announcement of the results of the European Central Bank’s stress tests.

As a result, and combined with loan repayments, recapitalisation and asset divestiture that brought in fresh cash, the liquidity buffers increased by about €1.25bn in commercial banks and in the co-ops during 2014.

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