By Jean Christou
The International Monetary Fund (IMF) has expressed concern that with parliamentary elections looming next year, Cyprus could find that maintaining reform momentum will be challenging, as a difficult political environment could continue to complicate passage of important pending reforms.
In its staff report on the 5th, 6th and 7th review of Cyprus’ adjustment programme, released on Tuesday, the IMF said the authorities’ commitment to the programme and its objectives remained high.
“However, with the governing party [DISY] in a minority position in parliament and the May 2016 legislative elections already in sight, securing sufficient support will be difficult. This poses challenges for reforms in the areas of privatisation and public administration and for further steps to assist clean-up of private sector balance sheets.”
The main issues at stake, according to the IMF, are effective implementation of the foreclosures and insolvency legislation as a means to reduce the continuing high levels of non-performing loans, and pushing forward on the privatisation of semi-government organisations.
Facing strong opposition from parties and unions, the government has pledged to come up with €1.4bn through the privatisation of telecoms company CyTA, the Electricity Authority (EAC) and the Cyprus Ports Authority (CPA).
The state has promised that legislation would be adopted to convert CyTA into a limited liability company by end-September 2015 and the regulatory framework for the CPA amended by the end October 2015.
By the end July 2015, it has pledged to hire an independent energy advisor to prepare a study for the legal unbundling and ownership structure of EAC as well as the required regulatory review. The legal unbundling is due to be implemented by end-March 2016
The IMF said however that the non-materialisation of privatisation proceeds was a potential risk. “If the envisaged privatisations were not implemented, this would increase debt by about 8 percentage points of GDP in 2020,” the staff report said.
Another big issue for the IMF is implementation of the foreclosures and insolvency legislation, which it said would be the key to resolving the problem of non-performing loans (NPL) in the island’s banking sector.
“The level has stabilised but it’s quite high in Cyprus and this is a challenge,” he said. The report cited 59 per cent at the end of 2014 and cautioned that the adequacy of the banks’ capital buffers remained contingent on continued progress in resolving NPLs.
“Loan restructuring has proceeded slowly across the core banks,” the report said. “Provision coverage of NPLs remained at 37 per cent for core domestic banks. While this ratio is lower than the European average of 46 per cent, it is in part offset by the higher capital buffers.”
While international creditors will be focusing on implementation of the foreclosures and insolvency legislation when they begin their 89th review on July 14, the report said that the last minute amendment to the law giving the mortgage debtor a preferential right to buy back the mortgaged property at the foreclosure auction was are not commonly found in similar laws in other countries “and may weaken payment discipline and lead to strategic behaviour by debtors”.
The IMF said a comprehensive review of the framework would therefore be conducted in early 2016 based on experience with its implementation.
The report did say that a gradual recovery is expected to take hold in 2015 with modest growth of 0.2 per cent for the year.
The unemployment rate remained high (15.6 per cent in April), but below the fourth review forecast. Deflation accelerated to 1.7 per cent in April, reflecting declining energy prices but also still-weak economic conditions, with core inflation at -0.8 per cent.
Growth is projected to pick up in 2016, and then stay at around 2 per cent in the medium term – well below pre-crisis rates of growth.
Last week, the IMF allowed the disbursement of about €278.4 million to Cyprus following the 5th, 6th and 7th reviews.