However, the mission reported that the pace of structural reforms has considerably slowed, and that “it is crucial to renew the reform momentum”, especially on public administration, the national health system, setting up a sustainable and efficient title deeds transfer system, modernizing the justice system and pursuing the efforts towards privatization and the reform of the electricity market.
These are the basic findings of the Troika mission to Nicosia according to an official publication of Directorate General of Economic and Financial Affairs of the European Commission (DGECFIN). The next PPS mission will take place in spring 2017.
According to the report adopted by the European Commission, the ESM, ECB and the IMF
the mission encouraged the authorities to:
- renew their efforts on this front to improve Cyprus’ growth potential and attract more foreign investment.
- underlined the need to pursue more forcefully the loan restructuring efforts, by making full use of all available tools, in order to accelerate the pace of reduction of NPLs.
- highlighted the need to increase administrative capacity and strengthen the efficiency of legal proceedings, in order to facilitate the use of the insolvency and foreclosure frameworks.
- and concluded that the pace of structural reform has considerably slowed, so it is crucial to renew the reform momentum: “including by legislating critical, but much delayed reforms. This includes key areas, such as public administration and the national health system. To further improve the business environment and attract more investment, progress needs to be achieved in key areas such as setting up a sustainable and efficient title deeds transfer system, modernising the justice system, and pursuing the efforts towards privatisation and the reform of the electricity market”.
DGECFIN staff found that “fiscal consolidation has been crucial for strengthening the credibility of the policy framework and facilitating market access of the sovereign. It is important to safeguard these achievements, including by withstanding the increased expenditure pressure. We note that the reform momentum has significantly weakened, with crucial legislation still awaiting adoption”.
On the macroeconomic front DGECFIN concluded that Economic growth in 2016 has been stronger than expected, supporting fiscal performance, driven by tourism and private consumption, which was supported by the effect of declining prices on real income and improving labour market conditions. Real GDP growth in 2016 is expected to exceed 2.5%, and to remain strong in 2017.
Unemployment is perceptibly declining, albeit long term and youth unemployment remain very high. Fiscal consolidation has continued and the government’s 2016 primary surplus target for 2016 is within reach. With the improved economic environment, the pressure for fiscal relaxation has increased. This should be resisted as fiscal risks remain significant; and because the downward path of public debt still remains to be firmly anchored. It is essential that legislative steps with a budgetary impact, such as the abolition of the immovable property tax, be compensated through well-specified measures at all government levels. In light of the fiscal risk, the mission underlined that fiscal discipline needs to be pursued, including by containing the public sector wage bill.
Finally, accelerated loan restructuring efforts and the more supportive economic environment have led to a decline in the outstanding stock of non-performing loans (NPLs), however, NPLs still remain at a very high level. The return of confidence has allowed banks to broaden their deposit base, improve liquidity and capital buffers. Their profitability, however, is constrained by a declining net interest margin and the need for additional provisioning. While new lending is strengthening, total credit to the economy continued to contract due to necessary balance sheet deleveraging, including through loan write-offs and restructurings.
The new insolvency and foreclosure frameworks are important achievements, but their implementation has to be stepped up. These tools are essential to help reduce the high levels of private debt and NPLs, as they provide debtors and creditors with diversified and efficient means to resolve nonviable debts and reallocate economic resources to more productive uses. Their use has been limited so far due to the increasing recourse to debt-to-asset swaps, which is welcome; but also due to slow administrative capacity building and the reluctance of some stakeholders to engage in time-consuming procedures.
Source: InCyprus
