By Poly Pantelides
CYPRUS’ recovery programme is on track, the island’s international lenders have said following the completion of the EU/IMF’s first mission to Cyprus to review the island’s bailout programme.
“We found the programme to be on track, authorities made good progress towards meeting their objectives,” the International Monetary Fund’s (IMF) Mission Chief Delia Velculescu said on Wednesday during a conference call on the conclusion of the first review mission.
The European Central Bank (ECB), the European Commission and the IMF had been visiting the island for the past two weeks to review the implementation of the Memorandum of Understanding (MoU) agreed as part of Cyprus’ €10 billion bailout in March.
Velculescu said the authorities’ fiscal measures in December 2012 and in April 2013 led to a “better fiscal performance measured up against programme targets”.
But although she said there was no need to revise any longer term economic assumptions, she also warned “uncertainty [remained] large”.
That uncertainty harbours risks as does the economic recession in light of the banking sector’s restructuring and capital controls, Velculescu said. Depositors in Cyprus still have to abide by capital controls, including limits on cash withdrawals and transfers, enforced in March to stop capital flight.
Velculescu said authorities have prepared a road map on gradually relaxing capital controls and restructuring the banks. The Bank of Cyprus’ (BoC) exit from the administration status, announced on Tuesday, was an “important step”, she said. To do that, BoC depositors have taken a 47.5 per cent loss on their deposits of over €100,000, in return for equity.
Finance Minister Harris Georgiades said that a smaller cut would still have ensured the BoC met regulatory capital requirements, but said that the higher, conservative, figure would “without a doubt” strengthen confidence in the bank. Sources have said the island’s lenders had insisted on the higher figure.
Velculescu said there was still a lot of work to be done as part of the bank’s restructuring. But while the IMF will be assessing the situation, the troika of lenders will not intervene on the BoC business model as such, she said. As part of Cyprus’ bailout, BoC was placed in administration in March, while the insolvent Laiki was shut down.
Velculescu also referred to other moves by Cyprus, including tackling tax evasion and money laundering.
The ECB said in a statement that “authorities have taken decisive steps to stabilise the financial sector and have already been gradually relaxing deposit restrictions and capital controls.” But the regulators warned that “risks [remained] substantial”.
“Continued full and timely policy implementation is essential for the success of the programme,” the ECB said.
The ECB said that indicators confirm an expected contraction of the island’s economic output of some 13.0 per cent during 2013-2014, with the labour market taking a bigger hit than anticipated, and unemployment rising. The ECB did say confidence had slightly improved and expected non-financial services to drive a modest recovery of growth from 2015 onwards.
Georgiades referred to a “positive result” earlier yesterday but added there was no room for complacency.
“There are great challenges lying before us,” Georgiades said, adding they would intensify efforts in the future and work towards handling state budgets “very carefully”.
But he said the island was able to meet its fiscal targets for the year without additional austerity measures.
He added they should expect no surprises when the IMF and the eurozone’s finance ministers meet in September to approve the disbursement of the next tranche of bailout aid of just over €1.5 billion.
