Delia Velculescu, head of the IMF mission for Cyprus, has called for a strong implementation of the Cypriot adjustment programme as risks are tilted to the downside.
In a teleconference after the first programme review, Velculescu said that although figures of the public finances for the first half of the year have faired better than expected, the IMF kept its macroeconomic targets unchanged "given the uncertainty and risks that are tilted to the downside." The IMF maintained its projections for 8.7% economic decline in the current year and a contraction of 3.9% in 2014, projecting a return to modest growth in 2015.
"The macroeconomic outlook remains difficult, while economic development in the first half of the year is somewhat better than expected, the macroeconomic baseline and fiscal targets were prudently left unchanged, given the uncertainty and risks that are tilted to the downside," Velculescu.
Velculescu commended the Cypriot authorities for making "good progress in programme implementation and setting an ambitious agenda ahead," noting however that "with large uncertainty and downside risks, fiscal prudence and strong and timely policy implementation remain critical for the programme success."
Cyprus and the European Commission, the European Central Bank and the IMF, collectively called as the Troika, agreed last March on a €10 billion EU bailout which featured a unprecedented conversion of 47.5% of uninsured deposits in the island`s largest lender, Bank of Cyprus (BOC), in a bid to plug its capital shortfall, in what is being called as a bail in. BOC also absorbed the "good" part of Laiki Bank which will be wound down. As a result BOC is currently recording capital adequacy ration (Core Tier 1 capital) of 12% well above of the 9% threshold set out by the regulating framework.
The IMF head of Mission also called for additional consolidation in the programme outer years to insure debt sustainability. According to IMF projections, the Cypriot public debt will peak at 126% of GDP in 2016 and gradually reduce to 105% by 2020.
Velculescu refrained from commenting on Cyprus President`s remark that capital controls, that have been imposed on the island`s financial system since the bailout agreement, could be lifted altogether by January 2014, pointing out that in line with the published road map of the Cypriot authorities "we do expect further relaxation to take place this year and the next as progress will be made with the financial sector recapitalisation and restructuring."
Noting that following the exit from the resolution of Bank of Cyprus steps have been taken to facilitate domestic transactions, Velculescu noted that "ultimately the full relaxation of restrictions depends on the implementation of the strategy and the return of confidence."
Replying to a question, Velculescu said that the BOC`s Core Tier 1 capital ratio above the 9% threshold was sought "to make sure that the bank can deal with both existing and prospective losses". She also recalled that the capital needs have been calculated by two independent audits carried by PIMCO and KPMG.
"In other words we do expect the deterioration of asset quality to continue but we see that the capitalization that is now in place in BOC will help to deal with that issue," she noted.
Invited to comment on the delay observed in the approval of the Board which is not in place, Velculescu said that the new board of directors needs to be operational as soon as possible and together with the management team needs to make progress with the restructuring plan.
"This plan will be instrumental for the return of confidence in this respect," she went on to say.
The Cyprus Central Bank has come under criticism from the government and political parties for delaying approval of some of the BOC`s Board members. The CBC says that six members delayed to send adequate information to prove that they are fit and proper for the post under the European Banking Authority regulations.
