In its statement following the post-programme surveillance mission, the IMF said that progress on restructuring bad loans “has been uneven” and this reflected “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”.
Warning the banks not to rely on the mini property boom, the IMF said: “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.”
It said that banks should instead focus on durable and sustainable loan work-outs, including through solutions that reduce a borrower’s debt to affordable levels.
It said there were still “operational barriers” to cutting NPLs, citing regulatory incentives that encourage banks to delay the recognition of losses or disposal of collateral, as well as impediments in the legal framework and “capacity constraints in the courts”.
“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 IMF said.
Cut the debt
The IMF was critical of the government’s fiscal performance, saying there had been “a sizable weakening of the underlying structural position since 2015” and that “recent fiscal outturns have been buoyed by cyclical developments” (in other words, by good economic growth).
The IMF recommended “frontloading debt reduction” and called for a primary surplus (budget balance excluding interest payments) of 3% of GDP – higher than the government’s target of around 2% for this year.
“Targeting a primary surplus of 3 percent of GDP (on a cash basis) for the next several years while saving any over-performance and directing additional resources to growth-enhancing investment would accelerate debt reduction and bolster potential output without materially lowering GDP growth”, the IMF said, touching on the ongoing disagreement between the Minister of Finance, Harris Georgiades, and the EU/IMF on the level of budget spending.
The IMF said that it would be “essential” to guard against fiscal slippages, “including from the envisaged national health service as well as from wage and social benefit spending”.
Like the European Commission and the European Central Bank, it also called for reform of the judiciary “to strengthen legal enforcement of commercial claims and speed up court procedures”.
Source: InCyprus
