The main financiers of the €10 bln Cyprus bailout programme have agreed to pay up the next instalments totalling some €380 mln within the next three weeks, following a positive review by inspectors that had been delayed by the foreclosures and insolvencies law that were outstanding in parliament since last September.
The IMF said that economic and fiscal outcomes in Cyprus have been better than expected, but that the high level of non-performing loans remains an urgent priority and must be addressed in order to preserve financial stability and boost growth and job creation.
On Friday, the IMF Executive Board in Washington completed the combined fifth, sixth and seventh reviews of the Cyprus economic adjustment programme supported by the Extended Fund Facility (EFF) enabling the disbursement of €278.4 mln, with total disbursements under the programme since March 2013 reaching €742.4 mln.
The Executive Board also approved a revised schedule of future disbursements and reviews, with the eighth review now expected to take place in September, with two more reviews following on a quarterly basis.
The three-year, €1 bln arrangement was approved on May 15, 2013 in addition to €9 bln in financial assistance from the European Stability Mechanism (ESM).
Following Friday’s Executive Board discussion, David Lipton, IMF First Deputy Managing Director and Acting Chair, stated that “Cyprus’s Fund-supported reform programme continues to produce positive results.”
“Liquidity and solvency in the banking system have improved, allowing the elimination of external payment restrictions. Going forward, it will be important to maintain the reform momentum and strong programme ownership,” he said.
“Addressing the high level of non-performing loans remains an urgent priority to preserve financial stability and boost growth and job creation. In this respect, adoption of the new insolvency and foreclosure legislation is a key step,” Lipton added.
Moreover, he said that “continued efforts are needed to strengthen banking supervision and build the capacity of the banking system to restructure loans in a sustainable manner.”
Lipton warned that “high public debt together with sizeable contingent liabilities warrants continued prudence and efforts to lock in fiscal savings from better-than-expected macroeconomic developments. Thorough implementation of the new welfare system is important to protect vulnerable groups, while public investment allocations need to be executed to support economic recovery.”
He concluded that “the authorities should continue to advance structural reforms to strengthen public finances and lay the ground for sustained growth. Fiscal reforms should focus on revenue administration, public financial management, and public administration. Progress in privatisation and further efforts to improve the business environment and reduce unemployment are also needed.”
Earlier on Friday, the Eurogroup of Eurozone finance ministers welcomed the conclusions presented following the sixth review mission that the Cyprus adjustment programme has been brought back on track, calling on Cypriot authorities to lend renewed momentum to the implementation of the fiscal-structural and structural reform agenda, including privatisation and public administration reform, “in order to improve economic growth prospects and strengthen public finances, while safeguarding the protection of the most vulnerable groups”.
The Eurozone ministers subsequently endorsed the disbursement of the €100 mln next tranche of financial assistance by ESM in mid-July.
Meeting in Brussels, the Eurogroup noted that the fiscal performance continues to be solid, the debt outlook has improved, and structural reforms are progressing in several areas, although unemployment remains high.
It indicated that reforms in the financial sector have progressed and that after repeated delays, the legal framework establishing a new foreclosure procedure has entered into force and that a comprehensive reform of corporate and personal insolvency laws has also been adopted, an essential step towards addressing the very high level of non-performing loans, which is a drag on restoring growth and job creation in Cyprus.
One key issue was facilitating the sale of loans and ensuring that title deeds are transferred without delay to property buyers.
