Chal­lenges for the econ­omy in 2016

Financial Mirror (Cyprus) - - FRONT PAGE -

The lat­est fig­ures have shown that, as com­pared to 2014, growth for the third quar­ter of 2015 was at 2.2%, which is the high­est rate of growth recorded since the fourth quar­ter of 2010. Also, the fis­cal data show high pri­mary sur­pluses. The fore­casts for the pe­riod be­yond 2015 are that there will be pri­mary fis­cal sur­pluses, with the tar­get be­ing 3% to 4% in the medium term, which is enough to place pub­lic debt on a path of sus­tain­abil­ity. Th­ese re­sults were help­ful in the credit rat­ing agen­cies’ up­grad­ing of the Cypriot econ­omy, and con­trib­uted to a suc­cess­ful exit to the in­ter­na­tional mar­kets in late Oc­to­ber with the is­suance of a 10-year bond at an in­ter­est rate of 4.25%. Cur­rently, we are at the last eval­u­a­tion of the eco­nomic ad­just­ment pro­gramme by the Troika lenders and, un­less some­thing un­ex­pected oc­curs, as of April 2016 Cyprus will be suc­cess­fully get­ting out of the Mem­o­ran­dum of Un­der­stand­ing.

How­ever, there are still many dif­fi­cul­ties and chal­lenges to be tack­led.

First, there is the huge prob­lem of un­em­ploy­ment, es­pe­cially among the young peo­ple. A large num­ber of young Cypri­ots opt to fol­low the path of mi­gra­tion as there are no sat­is­fac­tory new em­ploy­ment op­por­tu­ni­ties on the is­land. Fur­ther­more, a large pro­por­tion of the eco­nom­i­cally ac­tive pop­u­la­tion re­mains un­em­ployed for long pe­ri­ods of time. It could be said that, at the least, un­em­ploy­ment has been sta­bilised, but it still re­mains at very high lev­els, close to 16%.

The govern­ment, but the pri­vate sec­tor as well, must in­vest much more in de­vel­op­ment projects if un­em­ploy­ment is to be re­duced to ac­cept­able and af­ford­able lev­els.

There is also the big prob­lem with the alarm­ing rate of in­crease of the non - per­form­ing loans (NPLs) in the sys­tem. The lat­est fig­ures from the Cen­tral Bank of Cyprus (CBC) show that they now make up nearly 50% of the to­tal do­mes­tic loan port­fo­lio, a fig­ure of around EUR 27 bln. There­fore, the data show that there is a se­ri­ous prob­lem which banks must ad­dress and in­deed they will have to find cred­i­ble so­lu­tions to. Of course the ques­tion is what th­ese so­lu­tions would be and cited below are the pro­posed so­lu­tions to this grave prob­lem of NPLs:

- Firstly, the en­act­ment and adop­tion of the fore­clo­sure leg­is­la­tion and of the in­sol­vency bill frame­work will even­tu­ally force strate­gic de­fault­ers to ap­proach the banks and start co­op­er­at­ing.

- Se­condly, the banks need to in­crease the speed and ef­fec­tive­ness in the process of re­struc­tur­ing the loans.

- Thirdly, the amount of non-per­form­ing loans will start to de­cline sig­nif­i­cantly when the real econ­omy re­cov­ers and more jobs are cre­ated.

- Fi­nally, the es­tab­lish­ment of an as­set man­age­ment com­pany sim­i­lar to the Na­tional As­set Man­age­ment Agency - NAMA of Ire­land, or a “bad” bank, that would un­der­take all the prob­lem­atic loans and take them out of the bank­ing sec­tor, thus al­low­ing the banks to clean up their bal­ance sheets, could be an­other rad­i­cal so­lu­tion to this prob­lem.

An­other sig­nif­i­cant chal­lenge faced by the econ­omy are the struc­tural re­forms in­cluded in the Mem­o­ran­dum of Un­der­stand­ing, among which are the pri­vati­sa­tion of state owned or­gan­i­sa­tions, the Na­tional Health Sys­tem (GESY), and the re­form of the civil ser­vice sec­tor.

Un­for­tu­nately, we are far be­hind as re­gards this part of our com­mit­ments and the much needed struc­tural re­forms are not be­ing im­ple­mented. We had a golden op­por­tu­nity to im­ple­ment th­ese changes through the Mem­o­ran­dum of Un­der­stand­ing, but this op­por­tu­nity seems to have been lost. I am very much afraid that this may cost us dearly in the fu­ture.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.