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Troika: Cyprus outperforms fiscal targets

17 February, 2014

 * “Some delays” in parliament with privatisation, healthcare, welfare - EIB, EBRD to the rescue of SMEs *

Cyprus is the first programme country to outperform its fiscal targets, a senior official from the European Commission said yesterday, following the conclusion of the third assessment of the island’s 10-bln-euro bailout programme by the Troika of international lenders.
But work is progressing slowly as regards reforms, a condition for the disbursement of the third and fourth tranches of the aid. Four outstanding legislative bills that still need to be passed are on privatisation, the FRBSL fiscal responsibility and budget systems law, welfare reforms and the healthcare roadmap. These have to be concluded by the end this month or March.
The EC official said that Cyprus is meeting its targets with considerable margin, noting that “this is quite unusual in the programme countries. In Ireland targets have been met but I did not see before targets to be outperformed.”
The Troika revised its bleak projections for a contraction of 8.7% and 3.9% in 2013 and 2014, respectively, to a contraction of 7.7% and 4.89% in 2013 and 2014, maintaining its projection for a 0.9% growth in 2015. The official said that the real contraction in 2013 is expected to be close to 6%, which is a further improvement compared with the revised projections.
He noted, however, that the key challenge is the implementation of the programme.
"The key challenge is not to lose the momentum and continue to implement (the MOU) meticulously… this is extremely important for building the credibility of Cyprus," he said, adding that "the perspective for Cyprus in the rest of Europe is changing."
The official also called on the banks to implement the new set of rules issued by the Central Bank of Cyprus in a bid to stem the rising non-performing loans that surged to EUR 26 bln by November 2013.
He noted that the situation will get worse before it improves but the figures concerning NPLs remain within the estimates of a due diligence report carried out by asset management firm Pimco.
Highlighting the need for a reform in the insolvency framework, the official noted that "it is very important the banks to get more tools to encourage borrowers to pay," but he distinguished the case of primary residence for which "sufficient safeguards" should be given.
The amendment of the legal framework is considered as a standing request by commercial banks as an instrument to assist their efforts in convincing borrowers and especially borrowers in the construction and real estate sectors, for which a total of 7.24 bln loans have been granted of which 64% are considered as non-performing.
"I don’t think it is acceptable that people who have money overseas not to pay their debt," he said.
Bank of Cyprus officials said last month that NPL recovery was on track, despite the disagreement with the central bank over the interpretation of an NPL, regarded as a loan that has not been serviced in 90 days.
The EC official also noted that there were delays in privatisations and the approval of the framework for privatisations, covering the sale of Cyprus Telecommunications Authority, the Cyprus Ports Authority and the Cyprus Electricity Authority. Although the programme stipulated that the framework should be secure Parliament approval by end January, the Troika say that it should be approved prior to the disbursement of the fourth tranche by the end of March.
He noted that privatisations, apart from securing revenues, are considered as a tool to attract foreign direct investments (FDIs) which would in turn help stabilise the economy.
Acknowledging that the credit crunch since last March has also spun into a vicious circle for borrowers, the official said that FDIs, in the form of investing in the privatisation process, would also inject liquidity onto the system.
More funds are expected to become available, the EC official said, explaining that in addition to the 150 mln euros facility provided by the European Investment Bank, the European Bank of Reconstruction and Development (EBRD), that helped revive the post-Soviet economies of eastern Europe, may also be offering some facility to Cyprus.
“The aim is top provide as much liquidity into the market that would ultimately benefit the small to medium-sized enterprises (SMEs),” the official said.
The Troika mission also concluded that private consumption contracted, although by less than expected, while tourism and professional services have proven resilient. The financial sector is also showing signs of stabilisation. The economy is adjusting flexibly as prices and wages are declining, helping to cushion the full impact of the recession on jobs. Still, unemployment remains very high.
Moreover, the Troika sees as second challenge the need to normalise payment flows in the economy while safeguarding financial stability. With key milestones in the authorities’ roadmap now completed, the second phase of gradual relaxations of restrictions is expected to start shortly, it noted. Finally, the international lenders underline that efforts need to continue to strengthen implementation of banking sector regulation and supervision as well as of the anti-money laundering framework.
Conclusion of this review is subject to the approval process of both the EU and the IMF and is expected to be considered by the Eurogroup, the ESM board, and the executive board of the IMF by early April. Its approval would pave the way for the disbursement of EUR 150 mln by the ESM, and about 86 mln by the IMF.