Though economic recovery in Cyprus has begun following four years of recession, the European Commission said on Wednesday, authorities need to continue prudent policies in light of existing risks facing the Cypriot economy.
The Commission in its report on the 7th economic adjustment programme review, said that some reforms had suffered from delays, and that unemployment remained high at around 16 per cent.
It said the law on the state-owned enterprises`, corporate governance, and the reform of the health sector had not progressed much since the last mission, “as well as the implementation of the Immovable Property Tax reform that has been postponed to 2016 due to late adoption of the design of the new tax system”.
“The public employment service still lacks capacity to fully handle its task,” said the Commission.
“Efforts to reduce the significant title deed issuance backlog need to be accelerated, notably via a comprehensive streamlining of the issuance procedures,” it added.
The Commission also highlighted delays in the field structural reforms, noting that reforms such as the privatisation process and the public administration reforms are “critical to restore sustained economic growth”.
The report said economic growth returned to positive territory in the first quarter of 2015, led by professional services and tourism and, on the demand side, private consumption, partly supported by lower energy prices, lower interest rates and the euro depreciation.
Regarding the fiscal developments, the report says that they continue to exceed expectations, with a primary surplus of 1.2% of GDP at end-June 2015, about 0.9pp of GDP better than envisaged in the sixth review.
Taking into account the latest developments and updated macroeconomic projections, the 2015 government primary balance target has been revised from a surplus of 1.5% of GDP to a surplus of 1.9% of GDP, the report said.
“The authorities will need to continue implementing their budget prudently in light of existing risks, notably related to the uncertain fiscal impact of recently enacted tax reforms.”
With regard to the banking sector, the Commission noted that the situation was gradually improving, but a stronger implementation of financial sector reforms was needed to guarantee a sustainable stabilisation of the banking system.
“Even if there are some early signs that the rise of non-performing loans is levelling off, a decisive reversion of the NPLs trend has still to materialise. Addressing the excessive level of non-performing loans in the banking system remains the number one priority,” the report noted.