IMF approved a three-year SDR 891 million (ca. €1 billion; 563 per cent of the country's quota) arrangement under the Extended Fund Facility for Cyprus in support of the authorities' economic adjustment programme, allowing for the immediate disbursement of SDR 74.25 million (ca. €86 million).
The EFF arrangement is part of a combined financing package with the European Stability Mechanism (ESM) amounting to €10 billion. It is intended to stabilise the country’s financial system, achieve fiscal sustainability, and support the recovery of economic activity to preserve the welfare of the population.
Following the Executive Board’s action, Ms. Christine Lagarde, Managing Director and Chair of the Board, said:
“The Cypriot economy has suffered a confidence crisis, linked to weaknesses in the oversized banking sector and large external and internal imbalances. The authorities took bold steps to address the crisis, including the upfront resolution and restructuring of the two largest and insolvent banks at no fiscal cost, while protecting insured depositors. They also implemented ambitious fiscal consolidation measures. Nevertheless, challenges ahead are significant, including restoring credibility in the banking sector and reducing fiscal deficits and debt to sustainable levels.
“The three-year ESM/IMF-supported programme will help Cyprus address these challenges. The programme aims to achieve financial sector stability and debt sustainability to restore growth. The authorities’ commitment to use internal financing resources, together with support from European partners, helps to ensure that the programme is fully financed.
“The immediate priority is to stabilise the banking sector. The authorities need to complete the bank recapitalisation process, including by using public funds for solvent institutions where necessary. In parallel, decisive steps will be taken to restructure weak banks. Temporary payment restrictions should be relaxed at a pace consistent with maintaining financial stability, while minimising distortions to economic activity. It is important to strengthen supervision and regulation of banks and credit cooperatives, and to enhance the framework for anti-money laundering.
“Another priority is to achieve sustainable public finances. The fiscal consolidation package balances cyclical and sustainability considerations. It needs to be complemented by structural reforms to strengthen budget processes and revenue administration, while better targeting welfare programmes to protect vulnerable groups. Additional fiscal measures of close to 5 percent of GDP will be needed in outer years to put debt on a sustained downward path.
“The macro-economic outlook is subject to high uncertainty and risks to the programme are substantial. There is no room for implementation slippages. Full and timely implementation of the programme is critical to maintain credibility and achieve the programme’s objectives”, Ms Lagarde stated.
Press release
Transcript of a Conference Call on the Approval of an Extended Fund Facility (EFF) for Cyprus, 17.5.13
© International Monetary Fund
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