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CYPRUS: IMF asks for additional fiscal measures of permanent nature

31 July, 2014

An additional fiscal effort of a permanent nature will be required to achieve a primary surplus of 4% of GDP by 2018, Delia Velculescu, IMF Mission Chief for Cyprus, told a conference call on Wednesday.

The IMF staff team, conducting the 5th review discussions which ended last week, remained in Nicosia for separate discussions on an overall review of the Cypriot economy, also called the IMF`s Article IV Consultation.

“Cyprus has made impressive progress in addressing the large imbalances that were exposed in the crisis last year. Nevertheless the road ahead remains difficult and addressing the remaining challenges will take time and determination”, Velculescu told the conference call, analysing the conclusion of the consultation.

She said that recession is expected to continue this year, followed by “very modest growth” next year that will gradually increase toward 2% over the medium term.

She noted that the high and rising level of non performing loans (NPLs) is a “key obstacle” and “in practice progress has been too slow”.

“Putting in place the necessary debt restructuring legal framework, and this includes foreclosure and insolvency legislation, is urgently needed to set incentives for borrowers and lenders to negotiate in good faith solutions to re-establish loan repayment, in line with the borrowers capacity to do so. Ultimately the responsibility lies with both banks and the borrowers to agree on sustainable solutions for the benefit of all,” Velculescu said.

The approval of this legislation is a precondition for the conclusion of the 5th review, she said, adding that “if the law is not passed, the review will not be concluded and we may need to come back to Cyprus and re-discuss the situation”.

She also noted that “boosting bank capital buffers and continuing with bank restructuring are also essential to deal with NPLs and ultimately to ensure banks long run viability so that they can support the economy over the medium term” and welcomed the Bank of Cyprus recent capital raise of 1 bn. “We look forward to the completion of this transaction which will be an important milestone towards further strengthening confidence in Cyprus` banking sector” she said.

Turning to public finances, the IMF`s Mission Chief for Cyprus said that “with public debt high and still rising, significant medium term consolidation is needed to achieve the authorities` primary surplus target of 4% of GDP by 2018, which is required to place debt on a sustained downward path”.

“The adjustment will need to be gradual of a permanent nature and growth friendly, focusing on reversing the increases in spending prior to the crisis”, she said. “We remain flexible for the moment, given that there is still sometime until 2018 to reach such target and we are not yet ready to quantify and specify measures for each individual year. What we are focusing on is the overall need for measures during this period with a focus on statutory spending that was expanded prior to the crisis and that involves the public sector wage bill among others, and the focus here will be on permanent measures,” she explained.

She also underscored the need for “resolute implementation of structural reforms now under way”, including of the welfare system, public administration and public financial management. The authorities also need to continue the privatisation efforts and would need to identify and implement structural measures to boost growth and competitiveness, she added.
Furthermore, with regard to anti-money laundering and combating the financing of terrorism (AML/CFT), Velculescu said that the authorities` efforts focus on the implementation of the relevant framework and a number of steps have been taken.

In the case of FBME, she said replying to a question, “the Cypriot authorities have acted resolutely and quickly to address the problem and we are working with them to further strengthen their capacity in this area.”