Recession “less severe” due to tourism, services

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.