IMF: Cyprus' growth to remain brisk
Medium-term growth in Cyprus is expected to remain brisk, and the island’s capacity to repay the International Monetary Fund is expected to be satisfactory, the IMF said in an announcement on Monday.
The announcement issued at the end of the first post-program review, said: “Since exiting the IMF program one year ago, Cyprus’s economic recovery has gathered momentum, banks’ liquidity positions have improved, the restructuring of nonperforming loans (NPLs) has accelerated and the fiscal primary surplus has increased. These developments served to strengthen Cyprus’s repayment capacity. Nonetheless, continued very high levels of private sector indebtedness, nonperforming loans and general government debt remain vulnerabilities. Decisive progress on repairing private balance sheets, while upholding fiscal prudence and completing pending structural reforms are essential to build resilience, reduce the risk of adverse shocks to balance sheets and raise potential growth.”
According to the IMF’s statement, in 2017, GDP growth is forecast at approximately 2.5 per cent on continued support from foreign demand and external financing.
“Thereafter, growth is expected to ease marginally as repayment of private sector debt picks up, stabilising at just above 2 per cent from 2020,” the IMF added.
The Fund noted that Cyprus’ capacity to repay debt to the IMF will be satisfactory.
However, the IMF said that repayment capacity could be weakened in the “event of a new boom-bust growth cycle, if fiscal discipline is eroded or if risks in banks’ balance sheets materialise.”
Following the first post-program review the IMF drew the following conclusions on the Cyprus’ progress:
“A decisive upfront reduction in public and private debt is needed to rebuild policy buffers, cement confidence in macroeconomic fundamentals and policy commitments, deliver balanced, sustainable growth, and support balance sheet repair. This requires effort in three main areas:”
ACCELERATING NPL WORKOUTS, REDUCING EXCESSIVE DEBT BURDENS
The announcement said that restructuring has gained momentum over the past year, but NPLs remain very high and a portion of previously restructured loans tend to re-default.
“High NPLs also weaken banks’ profits. Restructuring progress across banks has been uneven, reflecting differences in the structure of their loan portfolios, the intensity with which various legal and other tools have been used, as well as in banks’ capacities to manage NPLs. Banks should be further encouraged not to defer restructuring in the expectation that future increases in output and property prices would autonomously improve recovery rates,” the IMF announcement said.
Instead, the IMF added, banks should focus on durable and sustainable loan work-outs, including through solutions that reduce a borrower’s deb to affordable levels.
“Operational barriers to NPL resolution, such as regulatory incentives encouraging banks to delay recognition of losses or disposal of collateral, remaining impediments in the legal framework and capacity constraints in the courts, should be addressed. It is important that newly-issued bank lending, which is providing welcome support to the economy, is underpinned by robust lending policies, strong business plans from borrowers and close monitoring of credit risk,” the announcement added.
FRONTLOADING PUBLIC DEBT REDUCTION
The IMF noted that accelerating public debt reduction would help to create a “prudent” buffer and safeguard the downward trajectory of the debt in the event of adverse shocks.
“Recent fiscal outturns have been buoyed by cyclical developments, despite a sizable weakening of the underlying structural position since 2015,” the IMF said.
The IMF added that targeting a primary surplus of three per cent of GDP (on a cash basis) for the next several years, while saving any surplus and directing additional resources to growth-enhancing investment would accelerate debt reduction and bolster potential output without materially lowering GDP growth.
“Guarding against fiscal slippages, including from the envisaged national health service as well as from wage and social benefit spending, will also be essential. Restarting the privatisation program would also contribute to lowering public debt. Completing pending reforms in the areas of revenue administration and public financial management, and adopting the package of civil service reform bills would also help safeguard public finances over the medium term,” the IMF said.
REINVIGORATING STRUCTURAL REFORMS
The IMF noted that progress with macro-critical reforms has largely stalled.
“Advancing the reform agenda would increase capacity to cope with external shocks and create sustainable employment opportunities by improving the business environment,” the Fund noted.
Focus, the IMF said, should be on expediting judicial reform to strengthen enforcement of commercial claims and speed up court procedures, restarting the privatisation program to increase economic efficiency and competition, and streamlining business procedures to attract new service sectors.