Challenges for the economy in 2016
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.