Re­ces­sion “less se­vere” due to tourism, ser­vices

Financial Mirror (Cyprus) - - FRONT PAGE -

The chal­lenges for the Cyprus econ­omy are fol­low­ing a down­ward trend, ac­cord­ing to a work­ing doc­u­ment of the Euro­pean Com­mis­sion that eval­u­ates the eco­nomic ad­just­ment pro­gramme, which, it says, re­mains on track and im­ple­men­ta­tion progress has been made in all key ob­jec­tives.

The doc­u­ment said that de­spite the fact that the re­ces­sion has been se­vere, it was less pro­nounced than ex­pected in 2013 (5.4%), thanks to the per­for­mance of tourism and pro­fes­sional ser­vices and the less-than-ex­pected de­crease in pri­vate con­sump­tion.

Em­ploy­ment has de­clined and the un­em­ploy­ment rate has in­creased sig­nif­i­cantly, how­ever, the labour mar­ket has proved flex­i­ble, while the grad­ual ad­just­ment of wages helped to con­tain the fall in em­ploy­ment, the re­port pointed out.

It added that the need for debt ad­just­ment of the pri­vate and pub­lic sec­tor from the cur­rent high level will con­tinue to act as an ob­sta­cle to eco­nomic growth.

GDP is ex­pected to de­cline fur­ther by 4.2% in 2014, and the econ­omy is ex­pected to re­turn to mod­est growth of 0.4% next year, and then only grad­u­ally im­proved, as do­mes­tic de­mand is bur­dened by the need to re­duce the very high lev­els of debt. How­ever, the Com­mis­sion con­sid­ers that these chal­lenges fol­low a down­ward trend.

The risks stem mainly from slower than an­tic­i­pated re­cov­ery of non-per­form­ing loans, a pos­si­ble pro­longed pe­riod of tight lend­ing con­di­tions, any slower than ex­pected delever­ag­ing process for house­holds, fur­ther de­te­ri­o­ra­tion in the labour mar­ket and the fur­ther in­crease in geopo­lit­i­cal ten­sions in Rus­sia and Ukraine.

Ac­cord­ing to the Com­mis­sion, the bud­getary tar­gets for 2013 have been achieved in a re­mark­able de­gree, both be­cause of con­tin­ued pru­dent budget ex­e­cu­tion and the less se­vere re­ces­sion than ex­pected. The pub­lic deficit in 2013 was fi­nally about 2 per­cent­age points be­low the tar­get set, while the govern­ment deficit in 2014 is pro­jected to be about half per­cent­age point lower than ex­pected, at 5.3% of GDP.

Re­gard­ing the bank­ing sec­tor, the Com­mis­sion noted that there are emerg­ing signs of sta­bil­i­sa­tion, al­though there are still sig­nif­i­cant chal­lenges. The chal­lenges have to do with the need for con­sol­i­da­tion of the bal­ance sheets from the high level of NPLs and to re­duce the debt of the pri­vate sec­tor, so as to re­store credit and sus­tain­able de­vel­op­ment.

A key el­e­ment to this pur­pose is the de­vel­op­ment of a suit­able frame­work for debt re­struc­tur­ing, the Com­mis­sion pointed out, adding also the need to con­tinue work on the im­ple­men­ta­tion of the re­struc­tur­ing plans of do­mes­tic banks. It is also im­por­tant to en­sure that fur­ther re­lax­ation of cap­i­tal con­trols does not en­dan­ger fi­nan­cial sta­bil­ity. The Com­mis­sion noted the need to con­tinue work against money laun­der­ing.

Re­gard­ing pub­lic fi­nances, the Com­mis­sion pointed out the strong fi­nan­cial per­for­mance so far, stress­ing that the Cypriot au­thor­i­ties should con­tinue to main­tain a pru­dent budget ex­e­cu­tion. As agreed by the start of the pro­gramme, it will be nec­es­sary for an additional ad­just­ment at the last years in or­der to achieve the long term goal for fixed pri­mary sur­plus of 4% of GDP, which is nec­es­sary to place pub­lic debt on a sus­tain­able down­ward tra­jec­tory.

Re­gard­ing struc­tural re­forms, the re­port said that their im­ple­men­ta­tion has pro­gressed, al­though some need to be ac­cel­er­ated. Progress has been made mainly in the ar­eas of tax ad­min­is­tra­tion, the man­age­ment of pub­lic fi­nances, re­form of taxation of real property and in im­prov­ing ac­ti­va­tion poli­cies in the labour mar­ket.

The re­port­con­cluded that the top pri­or­ity is the adop­tion of a wel­fare re­form, to pro­vide ad­e­quate so­cial pro­tec­tion for vul­ner­a­ble house­holds in the cur­rent phase of eco­nomic down­turn. At the same time the pri­vati­sa­tion plan should be rapidly im­ple­mented, as well as the es­tab­lish­ment of a na­tional health sys­tem.

Health Min­istry of­fi­cials have said that the na­tional health sys­tem will be im­ple­mented in two stage and com­pleted by mid-2016, while the govern­ment has pledged to em­bark on a pri­vati­sa­tion pro­gramme that will see sale of state as­sets and giv­ing up con­trol in un­prof­itable ser­vices, with the aim of rais­ing and sav­ing 1.4 bln eu­ros by 2018.

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