“Re­cov­ery has started, a need for pru­dent poli­cies”, says EU Com­mis­sion

Financial Mirror (Cyprus) - - FRONT PAGE -

The eco­nomic re­cov­ery in Cyprus has started fol­low­ing al­most four year of re­ces­sion, the Euro­pean Com­mis­sion said, not­ing how­ever the author­i­ties need to con­tinue pru­dent poli­cies in light of ex­ist­ing risks. Re­forms are part of the mem­o­ran­dum agreed with the Troika of in­ter­na­tional lenders, in­clud­ing the Com­mis­sion, the ECB and the IMF, in or­der to re­ceive the EUR 10 bln bailout pack­age. So far, Cyprus has utilised only 7 bln of that amount and in­di­cated it will not need much more as it ex­its the pro­gramme next March.

In a re­port on the sev­enth eco­nomic ad­just­ment pro­gramme re­view, the Com­mis­sion notes that the eco­nomic re­cov­ery has started, but un­em­ploy­ment re­mains high.

Eco­nomic growth re­turned to pos­i­tive ter­ri­tory in the first quar­ter of 2015, led by pro­fes­sional ser­vices and tourism and, on the de­mand side, pri­vate con­sump­tion, partly sup­ported by lower energy prices, lower in­ter­est rates and the euro de­pre­ci­a­tion, the re­port adds, not­ing that although the labour mar­ket shows un­em­ploy­ment around 16%.

Re­gard­ing the fis­cal de­vel­op­ments, the re­port said that they con­tinue to ex­ceed ex­pec­ta­tions, with a pri­mary sur­plus of 1.2% of GDP at end-June 2015, about 0.9pp of GDP bet­ter than en­vis­aged in the sixth re­view.

Tak­ing into ac­count the latest de­vel­op­ments and up­dated macroe­co­nomic pro­jec­tions, the 2015 gov­ern­ment pri­mary bal­ance tar­get has been re­vised from a sur­plus of 1.5% of GDP to a sur­plus of 1.9% of GDP.

“The author­i­ties will need to con­tinue im­ple­ment­ing their bud­get pru­dently in light of ex­ist­ing risks, no­tably re­lated to the un­cer­tain fis­cal im­pact of re­cently en­acted tax re­forms. If re­quired, ad­di­tional mea­sures should be taken in or­der to achieve as from 2017 a last­ing pri­mary sur­plus of be­tween 3% and 4% of GDP, which is war­ranted to main­tain public debt firmly on a sus­tain­able down­ward path,” the re­port noted.

With re­gard to the bank­ing sec­tor, Com­mis­sion said that the sit­u­a­tion

signs re­mains

of high, sta­bil­i­sa­tion, hov­er­ing at the

is grad­u­ally im­prov­ing, but a stronger im­ple­men­ta­tion of fi­nan­cial sec­tor re­forms is needed to guar­an­tee a sus­tain­able sta­bil­i­sa­tion of the bank­ing sys­tem.

“Even if there are some early signs that the rise of non-per­form­ing loans is lev­el­ling off, a decisive re­ver­sion of the NPLs trend has still to ma­te­ri­alise. Ad­dress­ing the ex­ces­sive level of non-per­form­ing loans in the bank­ing sys­tem re­mains the num­ber one pri­or­ity,” the re­port noted.

The Com­mis­sion high­lights de­lays in the field struc­tural re­forms, not­ing that re­forms such as the pri­vati­sa­tion process and the public ad­min­is­tra­tion re­forms are “crit­i­cal to re­store sus­tained eco­nomic growth”.

Other re­forms have suf­fered from de­lays. It pointed out the law on the state-owned en­ter­prises’ cor­po­rate gov­er­nance, the re­form of the health sec­tor has not pro­gressed much since the last mis­sion, as well as the im­ple­men­ta­tion of the Im­mov­able Prop­erty Tax re­form that has been post­poned to 2016 due to late adop­tion of the de­sign of the new tax sys­tem.

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