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

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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