Cyprus Mail

IMF officials see impressive achievements and three major challenges for Cyprus

Officials from the International Monetary Fund, which made funds available for Cyprus’s bailout programme, said that while the island’s economy made “impressive policy achievements” over the past three years, still had to complete three pending tasks, including reducing bad loans and public debt as well as completing growth enhancing reforms.

The comments of the IMF officials, mission chief Rachel van Elkan, senior economists Alejandro Hajdenberg and Alejandro Simone and resident representative Vincenzo Guzzo, were included in a survey that assessed the programme’s results and future challenges following the its completion as well as those related to the reunification process. The IMF posted the survey on its website on Tuesday.

Van Elkan said Cyprus’s economy was able to return to growth earlier than expected last year – helping to put unemployment on a downwards course – after successfully consolidating public finances, which had also put the banking sector “on a sound footing”.

“Significant institutional and legal improvements were also introduced, which will help ensure that Cyprus can avoid similar economic hardship in the future,” she said, adding that after the government regained access to international markets 16 months after the crisis, this “puts the country in a good position”.

Still, as the small and open Cypriot economy, which left “the acute care stage and is in the recovery phase,” continues to depend on external demand and capital inflows, it will need more resilience and flexibility through the reduction of non-performing loans and government debt, van Elkan said. “Another important task for Cyprus is to continue to carry out its privatisation strategy,” she continued.

The ratio of non-performing loans remains “very high” and is equivalent to 150 per cent of economic output while public debt which remains over 100 per cent “is also a vulnerability,” she said.

“Encouragingly, Finance Minister Harris Georgiades has committed to maintain prudent policies and to continue to implement reforms after the programme period,” van Elkan said.

Economist Simone said that Cyprus was able to consolidate public finances “under difficult economic circumstances,” while also taking care of the most vulnerable, in a clear reference to the introduction of the guaranteed minimum income, a scheme that distributes social benefits in a targeted way. “As a result, while overall public spending was reduced, the vulnerable received adequate assistance,” he said adding that the island simultaneously overhauled its tax collection capacity and modernised the budget process.

His colleague Hajdenberg said that the modernisation of legislation governing the operation of the banking sector, which saw its capital and liquidity improve, will help both lenders and borrowers work together to find solutions for unserviced loans. He also said that the law amendment governing the issue of real estate title deeds of buyers of properties form insolvent developers addresses a deficit in protecting property rights.

The IMF economist added that it remains “critical” for Cyprus to continue with growth enhancing structural reforms in order to reduce its unemployment rate, currently seen at 15 per cent.

Alejandro Simone singled out the reform of the public administration proposed by undersecretary Constantinos Petrides. Simone described it as “particularly important” as it also aims at ensuring that the government’s wage bill won’t rise again at a faster rate compared to economic growth.

Vincenzo Gusso, said that the IMF, which he represented in Cyprus, is “working on integrating public finances through an efficient federal structure, assessing the health of the financial sector, developing a strategy for the euro changeover in the Turkish-Cypriot community, and constructing a reliable set of integrated macroeconomic statistics”.

The IMF is working on developing both microeconomic and fiscal frameworks for a reunified Cyprus in an attempt help the island achieve an economically viable solution that will encourage trade and investment and raise long-term growth.

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