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