The increase in non-performing loans (NPLs) in the Bank of Cyprus (BoC) is in line with Pimco’s projections, IMF Mission Chief for Cyprus Delia Velculescu has said.
Pimco carried out a due diligence report on the island’s banking system, on the basis of which the Cypriot banks were recapitilised.
Asked about the increase in NPLs, during a conference call on the third review of Cyprus’ adjustment programme, Velculescu said that “what we have seen so far remains in line with the Pimco projections”.
A delegation of Cyprus` lenders (the European Commission, the European Central Bank and the IMF, collectively known as the Troika), completed yesterday the third programme review.
Velculescu said that the main conclusion of the mission is that “the program remains on track although challenges remain”.
“The programme remains on track, Cyprus still faces significant risks. Continued full and timely policy implementation remains essential for the success of the program” she noted.
Velculescu said that the macro fiscal performance has been better than expected, adding that the Troika expects output to have fallen by around 6 percentage points in 2013, which “represents deep and painful recession which is coupled with falling wages and rising unemployment”.
Still, she added, it remains close to 2 percentage points better than forecast during the last review and it is close to 3 percentage points better than the initial program forecast.
According to Velculescu, the performance of the fiscal accounts exceeded programme targets by a significant margin, which “is the result of both prudent execution of budgetary spending last year and of the better revenue performance due to the macroeconomic outturn”.
IMF Mission Chief for Cyprus noted that there are signs of stabilisation in the banking sector, with the BoC making progress in implementing its restructuring plan and the Cooperative sector having put in place a restructuring plan as well. “All preconditions for the recapitilsation of the Coop sector have been fulfilled and we expect the recapitilsation of the sector to proceed shortly” she said.
Deposit trends are showing signs of stabilisation in recent months, she also noted.
Delia Velculescu underlined that “important challenges remain” for the economy of Cyprus.
At this point, she explained, “we have not changed the programme forecast for 2014 and beyond which projects output to fall by 4.8% this year and to modestly grow next year by about 0.9%.”
“Given that the macroeconomic uncertainties surrounding the outlook remain large the authorities will need to continue to implement the 2014 budget prudently, building on their strong fiscal performance to date” she noted.
In the financial sector one key challenge is dealing with the very high level of non-performing loans, she said.
“In this regard banks and the Co-ops will need to put in place adequate arrears management frameworks and the authorities will need to reform the debt restructuring legal framework to provide incentives for borrowers and lenders to negotiate and reach solutions” she added.
Another key challenge, according to Velculescu, is to normalise payment flows in the economy while safeguarding financial stability. “The authorities have a milestone based roadmap to guide this process. With key milestones now completed, the second stage of gradual relaxations of restrictions is expected to start shortly” she said.
With regard to structural reforms “where the authorities’ agenda is very ambitious, the challenge is to accelerate reform implementation” Velculescu noted, adding that “a key priority is the reform of the social welfare system”.
Moreover, efforts need to be intensified to fight tax evasion and the adoption of the framework law for privatization is a key step to kick-start the process of privatisation of semi-governmental organisations, she said.
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