Troika: “You’re getting there, but you’re too slow”

Cyprus seems to be doing well as regards the implementation of of the economic reform programme, but still needs to overcome three major hurdles in order to secure the next tranche of financial aid from the Troika of international lenders.

Auditors from the Troika of international lenders (EC, ECB, IMF) issued their report after concluding their visit to Nicosia on November 3-13 to review Cyprus’s economic reform programme, saying that economic activity has continued on a positive trend since early 2015, while the banking system continues to heal.

Although there is evidence that the slow pace of debt restructuring is picking up, non-performing loans (NPLs) remain high and the pace of lending is subdued, they said, adding that the fiscal targets for the third quarter of 2015 were met with substantial margins. In addition, the authorities are making progress on their structural reform agenda.

Looking ahead, increasing the pace of reform under the programme will be essential to entrench the progress achieved.

Reducing the excessive level of NPLs remains the number one priority, the Troika report said. It is a necessary condition for a sustainable stabilisation of the banking system and the resumption of lending. In this context, the teams took note of the recent adoption of a law to facilitate the sale of loans, which is a key programme commitment.

“A preliminary assessment indicates that the law contains a number of favorable elements. The final assessment will be based on the consolidated official version and implementing regulations. Going forward, the authorities should take all necessary actions to effectively implement this legislation, as well as the insolvency and foreclosure frameworks, in order to decisively reduce NPLs,” the report said.

Moreover, continued sound public finances are needed to ensure that the public debt ratio returns to an acceptable level while steering public spending toward growth-enhancing activities. Finally, moving decisively ahead with structural reform — including, first and foremost, the privatisation process, electricity sector unbundling and the public administration reforms — is critical to cement the improvements in public finances and support sustained economic growth and job creation.

Conclusion of the reviews is subject to the approval processes of both the European Union and the IMF, which is expected to be initiated in January 2016.

“The economic recovery has started, but unemployment remains high,” the report said.

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 labour market shows signs of stabilisation, but unemployment remains high, hovering at around 16%. Prices continued declining, largely reflecting declines in the energy and tourism sectors. Growth is expected to settle at 0.5% this year, gradually regaining strength in 2016.

The fiscal developments 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.

“The financial situation of the banks 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 nonperforming loans is levelling off, a decisive reversion of the NPLs trend has still to materialise.”

The report added that the reform of corporate and personal insolvency laws is being implemented.

Some progress has been noted on important growthenhancing reforms, but firmly moving ahead - including the privatisation process and the public administration reforms - is critical to restore sustained economic growth.

Further criticism came on the long delays in reforms and implementation of certain bills.

“Other reforms have suffered from delays. The law on the state-owned enterprises’ corporate governance, which aims at ensuring a more effective monitoring of the functioning of SOEs and minimising fiscal risks, has not yet been adopted. Also, the reform of the health sector has not progressed much since the last mission. The implementation of the Immovable Property Tax reform has been postponed to 2016 due to late adoption of the design of the new tax system. The public employment service still lacks capacity to fully handle its task. Efforts to reduce the significant title deed issuance backlog need to be accelerated, notably via a comprehensive streamlining of the issuance procedures.”

The report said that “progress has been generally slow in developing a comprehensive strategy to restore Cyprus’ growth potential, even if important growth-enhancing steps have been taken on various fronts.”

Three prior actions were set for the granting of the eighth disbursement, relating to delayed steps of importance to reducing the level of NPLs and to key structural reforms. The first prior action concerns the adoption by the House of Representatives of legislation to solve the backlog of title deeds transfer.

“Moreover, even if not a prior action, adoption of the legislation regarding to the sale of loans is expected to take place before the release of the next tranche of financial assistance. The second and third prior actions relate to adoption by the Council of Ministers of legal proposals for the corporatisation of the Cyprus Telecommunications Authority (CyTA) and for the horizontal reform of the public administration.”

“These are key structural reform commitments that have not progressed sufficiently,” the Troika report concluded.