The European Central Bank and the European Commission said that while Cyprus has made some good progress in fixing its economy in recent years, this progress is still not good enough, citing a slowdown of the reform process and a lack of forceful application of tools to reduce bad loans.
“Reforms undertaken by Cyprus during the programme have started to bear fruit with robust economic growth and positive developments in the financial sector,” the ECB and the Commission said in joint statement on Friday after delegations of the troika, which also includes the International Monetary Fund, completed the first post-programme surveillance mission in Cyprus. “The pace of structural reform has considerably slowed. In the view of the mission, it is crucial to renew the reform momentum, including by legislating critical, but much-delayed reforms”.
Cyprus needs to focus its reform efforts on public administration and the introduction of the national healthcare scheme, overhauling its title deed transfer system, modernising its courts, privatising state-owned companies and reforming its electricity market, the statement said. The reforms, which were included in Cyprus’s economic adjustment programme agreed in exchange to €10bn in bailout funds more than three years ago, are facing strong opposition from political parties and unions.
The government ditched plans to privatise state telecoms company Cyta earlier this year, after doing the same with power producer Electricity Authority of Cyprus in 2015. In addition, while the government is trying to push healthcare reform forward via political consensus, it suffered setbacks after doctors and nurses unions decided to strike. Meanwhile, following the submission of a bundle of draft laws to the parliament last year to reform the public sector, lawmakers started debating on them just three months ago.
“The new insolvency and foreclosure frameworks are important achievements, but their implementation has to be stepped up,” the two institutions said. “These tools are essential to help reduce the high levels of private debt and non-performing loans, as they provide debtors and creditors with diversified and efficient means to resolve unviable debts and reallocate economic resources to more productive uses”.
Still, use of the two new laws, enacted last year, “has been limited so far due to the increasing recourse to debt-to-asset swaps, which is welcome, but also due to slow administrative capacity building and the reluctance of some stakeholders to engage in time-consuming procedures,” the ECB and the Commission said. “The mission highlighted the need to increase administrative capacity and strengthen the efficiency of legal proceedings, in order to facilitate the use of the insolvency and foreclosure frameworks”.
The two European institutions said that while Cyprus’s economy is expected to grow 2.5 per cent this year, ahead of expectations, authorities will need to resist pressure for fiscal relaxation.
“It is essential that legislative steps with a budgetary impact, such as the abolition of the immovable property tax, be compensated through well-specified measures at all government levels,” the ECB and the Commission said. “In light of the fiscal risk, the mission underlined that fiscal discipline needs to be pursued, including by containing the public sector wage bill”.