Vincenzo Guzzo, the IMF’s Resident Representative in Cyprus on Thursday called for greater efforts to prevent the slowly-growing economy from eventually stalling.
“Further acceleration may be hard to achieve,” Guzzo cautioned, citing IMF staff projections, where growth is expected to remain at 2 per cent from 2017 through to 2020.
NPLs are the biggest drag on the economy, the IMF official stressed.
He was speaking at the 6th Nicosia Economic Congress in Nicosia.
“Overleveraged firms have little incentive to invest because any return has to be allocated to service their debt. This implies that demand for credit is weak, which further weighs on banks’ profits,” said Guzzo.
The second challenge relates to the high public sector debt, which reached 109 per cent of GDP in 2015.
A third major challenge concerned the ease – or lack thereof – of doing business on the island.
Guzzo recalled that Cyprus ranks 25 out of 28 EU countries in the 2016 World Bank Doing Business Report.
A more business-friendly environment would attract more investment.
“Privatising state-owned enterprises would allow better and less expensive services for the population and would attract foreign direct investment which can bring jobs and increase liquidity in the economy,” he said.
The general view at the congress was that the island’s economy might be on the rebound but a lot more has to be done before the economy can turn the corner and into sustained growth.
Finance Minister Harris Georgiades said Cyprus was still not out of the woods after completing its adjustment programme in March and after its economy exited a prolonged recession even though it is “standing on its own feet”.
“The message that I want to send is not one of complacency,” Georgiades told delegates.
“On the contrary, I have to admit that I am concerned. The programme exit is nothing else than a second chance which we got not with slogans and denial but with sacrifices and responsible decision making”.
The finance minister, who also oversaw Cyprus’s return to financial markets, said his concern is caused by “behaviours indicating that we haven’t learned from mistakes of the past”.
His comments were the first reaction to Sunday’s elections result, which catapulted eight parties into parliament, giving a significant boost to the populist bloc which promised to lower taxes, and compensate people affected by the banking crisis.
“Some people may believe that the programme exit signals the return to the old times” when “demands were satisfied based on pressure exercised by interest groups,” Georgiades added.
“We may, after all, have a short memory and have forgotten that citizens ultimately pay the bill. Sometimes in a painful way”.
The minister said that over the next two years, there will be no need to take additional fiscal consolidation measures while the government will attempt to boost growth by reducing the tax burden on households and companies.
Georgiades said the government’s next item on its to-do-list is the reform of the public sector based on a bundle of draft laws submitted to the parliament nine months ago, which include the overhaul of the public payroll by linking it to economic growth.
For her part, Central Bank of Cyprus Governor Chrystalla Georghadji cited an ongoing study by the CBC showing that while the increase in bad loans over the past years was partly caused by strategic defaults, the main reason was a decline in incomes.
While Georghadji gave no further details on the exact dimensions of strategic defaults, she added that the assessment of the financial capacity of borrowers remains key both to designing effective policies to prevent borrowers able to repay their debts from opting not to do so and to fine-tuning loan restructuring strategies.
Cyprus modernised its foreclosure and insolvency legislation last year in an attempt to help banks reduce their non-performing loans and effectively tackle strategic defaulters.
The central bank governor spoke of “positive signs” indicating a gradual recovery in the banking system and an ease in the non-performing loans which fell in February to €26.8bn from €27.3bn in December 2014.
While the cure rate of loan restructurings agreed from January 2014 onwards rose to an “encouraging” 76 per cent, it will take up to five years before the problem “starts to be resolved,” she added.