On November 28, the IMF Executive Board concluded its latest consultation with Cyprus saying the near-term outlook for the economy was favourable, with growth expected to remain at around 4.2% in 2018–19, supported by the services sector and largely foreign-financed investments.
Over the medium term, economic growth is projected to slow to its long-run potential rate of around 2.5%, as the transitory effects of the investment boom gradually dissipate. Fiscal performance is expected to improve with a primary surplus of around 5% in 2018–19. Public debt is thus expected to be on a firm declining path, falling below 70% of GDP by 2023, despite a sharp increase earlier this year following the resolution of the Cyprus Cooperative Bank.
However, the economic outlook could weaken if implementation of NPL resolution is delayed, while public debt sustainability could be undermined by realisation of contingent liabilities or erosion of fiscal discipline,” the IMF report said.
Directors observed that private and public debt remain large while NPL ratios were 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.
They 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.
Similar sentiments were expressed by the European Central Bank and the EU Commission on Friday in Cyprus’ Autumn report.
The IMF report highlighted the need for banks to continue efforts to strengthen their balance sheets. They urged banks to diversify income sources and consolidate operations to improve cost-income ratios and better position themselves against increased competition. Directors recommended strengthening regulatory guidance on loan restructuring and exercising vigilance over bank lending policies, the adequacy of provisioning, and debt-to-asset swap policies.
It also 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.
Source: Cyprus Mail
