DESPITE ITS strong growth, the Cypriot economy still has key vulnerabilities, like the high level of bad debts, which could be compounded by the worsening external environment, EU officials said on Friday.
According to European Commission staff who conducted the sixth post-programme surveillance mission in liaison with staff from the European Central Bank, the IMF, and the European Stability Mechanism, the Cypriot economy continued to grow strongly in 2018 despite the global slowdown, reaching 3.9 per cent in 2018.
“However external headwinds are increasing and important national vulnerabilities remain,” their report said, and the “growth momentum is forecast to ease further, mostly reflecting the less favourable external environment.”
“These challenges are further compounded by key vulnerabilities of the Cypriot economy, notably the still very high levels of non-performing loans (NPLs), private, public and external debt in a context of low productivity growth and high dependency on foreign capital flows.”
For 2019 and 2020, the budget balance is expected to resume posting sizeable surpluses, the report said.
Risks in the next two years mainly relate to the fiscal impact of the healthcare reform and the outcome of court rulings on past measures to reign in the public sector wage bill.
“Moreover, a sharper-than-currently-expected slowdown may adversely affect fiscal revenues.”
The report noted the significant rise in public debt in 2018 due to the bank support measures related to the sale of the co-op bank, but was expected to steadily decline thereafter.
“The high public debt underlines the importance of a continued prudent expenditure management to firmly anchor the downward path of public debt in line with the requirements of the Stability and Growth Pact.”
It said Cyprus made significant progress in consolidating its banking sector and reducing NPLs held by banks, but important challenges remain.
To continue with NPL resolution, it was now essential to enhance payment discipline and resolve unviable debt by fully using the amended insolvency and foreclosure frameworks.
“Rigorously assessing the compliance with the eligibility criteria and swiftly triggering foreclosure procedures in the case of re-defaults will be critical for the performance of the forthcoming ESTIA scheme for NPLs collateralised with primary residences.”
Another key priority is the establishment of Kedipes as a successful asset management company in line with the corresponding state aid decision.
“This includes setting up an effective governance framework, ensuring operational independence from the State, and having an adequate supervisory framework.”
The EU officials urged Cyprus to seize the opportunity provided by the still favourable conditions to step up the pace of structural reforms to boost potential growth.
“A key priority is the judicial reform, which is essential for the functioning of the economy. This involves increasing the specialisation of courts, clearing the high accumulation of cases and revising the outdated civil procedure rules. This would also have a beneficial impact on repayment discipline. Moreover, it is important to swiftly address the long-overdue reform of the title deeds issuance and transfer system.”