“The economic recovery has continued to gain strength even as progress on the structural reform agenda has been modest,” the IMF said on Friday in a statement on its website, three days after releasing a €126.3m tranche of bailout money.

“Further gradual progress in lowering unemployment is expected over the medium term,” the IMF said. “The outlook remains subject to risks. On the negative side, risks relate to slow progress in addressing the high level of non-performing loans in the banking system and the drag on private credit, the possibility of spill overs — largely through confidence effects — from Greece, and developments in Russia”.

“On the positive side, continued recovery of domestic demand, the effect of depreciation of the euro on exports, and the potential for some positive spill overs from Greece provide some upside,” the IMF added.

As a result of low energy prices, the IMF said that it expects consumer prices to drop 1.6% this year before falling a further 0.6% next year.

The finance ministry expects the Cypriot economy to grow by about 2% this year.

Banks should focus their efforts by utilising recently acquired tools, such as the legislation allowing Cypriot banks to sell loans, the new foreclosures and insolvency legislation and their internal loan-restructuring divisions, to reduce their non-performing loan stock, which in November fell to 46.1% of their overall loan portfolio, the IMF said.

As the Central Bank of Cyprus “is taking an increasingly active role” reducing non-performing loans, the implementation of the insolvency legislation should be accelerated in order to speed up the reduction of bad loans, the IMF said, adding that additional action is needed to tackle strategic defaults.

“Understanding the financial capacity of borrowers is key to designing effective macro-prudential policies and to further fine-tuning the loan restructuring strategy,” the IMF said. “Anecdotal evidence suggests that a nontrivial portion of household non-performing loans is held by borrowers with the financial capacity to make all their loan payments — i.e., strategic, rather than economic, defaulters. This highlights the importance of strengthening banks’ internal arrears management mechanisms and fully utilizing the tools provided by the new debt restructuring framework”.

The IMF, which with the latest bailout funds disbursement increased the total amount of its financial assistance to €1bn, said that while preparations for the privatisation of the commercial operations of the Limassol port are proceeding according to plan, the corporatisation of state-owned telecom Cyprus Telecommunications Authority, expected to be completed by the end of January, “suffered further setbacks largely due to protracted discussions with the unions” on the status of its workers in the future and “political debate about the benefits of privatisation”.

While the government wants to legally unbundle the transmission and distribution as well as the production and supply operations of the state-owned power producer Electricity Authority of Cyprus, the removal of the company from its privatisation list “may preclude further efficiency gains,” the IMF said.

Source: Cyprus Mail