Statement by the EC, ECB and IMF on the fourth review mission to Cyprus

17 May 2014

Staff teams from the European Commission, ECB, and IMF found that Cyprus' programme which seeks to ensure the recovery of economic activity, remains on track and fiscal targets for the first quarter of 2014 were met with a considerable margin.

Staff teams from the European Commission (EC), European Central Bank (ECB), and the International Monetary Fund (IMF) visited Nicosia 6-17 May 2014 for the fourth review of Cyprus's economic programme, which is supported by financial assistance from the European Stability Mechanism (ESM) and the IMF. Cyprus’s programme seeks to ensure the recovery of economic activity to preserve the welfare of the population by restoring financial sector stability, strengthening public finance sustainability, and adopting structural reforms to support long-run growth.

Cyprus’s programme remains on track. Fiscal targets for the first quarter of 2014 were met with a considerable margin, reflecting better-than-projected revenue performance and prudent budget execution. Progress has been made with the recapitalisation and consolidation of the cooperative credit sector, and banks are advancing with their restructuring plans. This has allowed for a significant liberalisation of domestic payment restrictions, in line with the government’s roadmap. The authorities have also taken steps toward implementing their ambitious structural reform agenda.

While the recession this year is expected to be somewhat less severe than anticipated, the outlook remains challenging. The contraction of output for 2014 has been revised down to 4.2 per cent from 4.8 per cent, given the better-than-expected outturn for 2013 and other recent indicators pointing to gains in confidence. Unemployment remains very high, and large non-performing loans are constraining the ability of banks to supply credit to the economy. As a result, the recovery is now expected to be more subdued than previously forecast, with growth projected at 0.4 per cent in 2015 and gradually improving thereafter, as domestic demand is weighed down by the need to reduce very high levels of indebtedness.

The first key challenge is to effectively reduce non-performing loans. This is essential to allow for a resumption of credit to the private sector to support growth and job creation. Reforming the legal framework for foreclosure and insolvency is paramount in order to provide balanced incentives to borrowers and lenders to negotiate and reach agreement on restructuring of non-performing loans, while avoiding undue hardship. 

A second challenge is to maintain public finances on a sustainable path. The authorities are making progress in this area, having consistently exceeded programme fiscal targets. Still, prudent budget execution should be maintained, given still high macroeconomic uncertainty and downside risks which may weigh on fiscal outcomes. 

The third challenge is to strengthen institutions. The authorities are preparing to launch the reform of the welfare system, introducing a guaranteed minimum income scheme to protect vulnerable groups during the current downturn. They are also making progress with reforming the revenue administration to increase its effectiveness and efficiency; they need as well to strengthen collection powers to resolutely address tax evasion and non-compliance.

Continued full and timely policy implementation remains essential for the success of the programme, given still high risks.

Conclusion of this review is subject to the approval process of both the EU and the IMF. The matter is expected to be considered by the Eurogroup, the ESM Board of Directors, and the Executive Board of the IMF by early July. Their approval would pave the way for the disbursement of €600 million by the ESM, and about €86 million by the IMF.

Full statement

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