Cyprus has to further bring down its high NPLs ratio and its bulging public and private debt, the International Monetary Fund Executive board concluded after its consultation with Cypriot authorities.
“Private and public debt remain large while NPL ratios are still among the highest in Europe. They encouraged the authorities to make further efforts to address these legacy problems and strengthen economic growth over the medium term,” said an IMF statement on Monday.
It said the “Directors emphasized the importance of further measures to facilitate a steady decline in NPLs on a durable basis”.
The IMF called for steadfast implementation of the amended legislative framework on foreclosure, insolvency, sale of loans, and securitization, supplemented by a strengthening of the court system and removal of uncertainties related to title deeds.
Directors also stressed the need to enhance the governance and supervisory framework for the recently-established asset management company.
“They recommended that to limit moral hazard, the proposed Estia scheme aimed at encouraging distressed borrowers to begin servicing their loans be better targeted and based on appropriate assessment of borrowers’ capacity to repay,” the IMF said.
Directors highlighted the need for banks to continue efforts to strengthen their balance sheets.
Banks were urged to diversify income sources and consolidate operations to improve cost-income ratios and better position themselves against increased competition.
Strengthening regulatory guidance on loan restructuring and exercising vigilance over bank lending policies, the adequacy of provisioning, and debt-to-asset swap policies, was recommended.
“Directors welcomed Cyprus’s robust fiscal performance and emphasized that strict spending discipline should be maintained.”
They cautioned against relying on transitory revenues from cyclical gains and one-off measures to finance permanent spending initiatives and took positive note of the authorities’ commitment to cap expenditure increases, including the public wage bill, in line with the medium-term GDP growth rate, in order to create room for growth-enhancing spending.
The IMF board agreed that “fiscal structural reforms are needed, and recommended strengthening public financial management, monitoring risks from local governments and the state-owned sector, and improving the corporate governance of commercial state-owned enterprises”.
Directors stressed the need to undertake institutional reforms and further enhance the investment climate and raise medium-term growth potential.
They agreed that reforms to increase the efficiency of the courts, speed up the enforcement of commercial claims, and clear the backlog of cases should continue.
They also recommended expediting legislation to strengthen the governance and autonomy of the Central Bank of Cyprus and encouraged further efforts to mitigate AML/CFT risks.
Directors noted that active labour market policies and investment in higher value-added sectors can help reduce high youth unemployment and skills mismatch, thereby promoting more inclusive growth.
