IMF urges Cyprus to reduce one of Europe’s highest NPL rates
Cyprus has to further bring down its high NPLs ratio and its bulging public and private debt, the International Monetary Fund Executive board concludes.
“Private and public debt remain large while NPL ratios are still among the highest in Europe. They encouraged the authorities to make further efforts to address these legacy problems and strengthen economic growth over the medium term,” said an IMF statement on Monday.
It said the “Directors emphasised the importance of further measures to facilitate a steady decline in NPLs on a durable basis”.
The IMF called for steadfast implementation of the amended legislative framework on foreclosure, insolvency, sale of loans, and securitisation, supplemented by a strengthening of the court system and removal of uncertainties related to title deeds.
Directors also stressed the need governance and supervisory framework established asset management company.
“They recommended that to limit moral hazard, the proposed Estia scheme aimed at encouraging distressed borrowers to begin servicing their loans be better targeted and based on appropriate assessment of borrowers’ capacity to repay,” the IMF said.
Directors highlighted the need for banks efforts to strengthen their balance sheets.
Banks were urged to diversify income sources and consolidate operations to improve cost-income ratios and better position themselves against increased competition.
Strengthening regulatory guidance on loan restructuring and exercising vigilance over bank lending policies, the adequacy of provisioning, and debt-to-asset swap policies, was recommended.
“Directors welcomed Cyprus’s robust fiscal performance and emphasised that strict spending discipline should be maintained.”
They cautioned against relying on transitory revenues from cyclical gains and one-off measures to finance permanent spending initiatives and took positive note of the authorities’ commitment to cap expenditure increases, including the public wage bill, in line with the medium-term GDP growth rate, in order to create room for growthenhancing spending.
The IMF board agreed that “fiscal structural reforms are needed, and recommended strengthening public financial management, monitoring risks from local governments and the state-owned sector, and i mproving the corporate governance of commercial state-owned enterprises”.
Directors stressed the need to undertake institutional reforms and further enhance the investment climate and raise medium-term growth potential.
They agreed that reforms to increase the efficiency of the courts, speed up the enforcement of commercial claims, and clear the backlog of cases should continue. to for enhance the the recently-
They also recommended expediting legislation to strengthen the governance and autonomy of the Central Bank of Cyprus and encouraged further efforts to mitigate AML/CFT risks.
Directors noted that active labour market policies and investment in higher value-added sectors can help reduce high youth unemployment and skills mismatch, thereby promoting more inclusive growth.
However, Moody’s said the near-term outlook for the economy is favourable, with growth expected to remain at around 4.2% in 2018–19, supported by the services sector and largely foreign-financed investments.
Over the medium term, economic growth is projected to slow to its long-run potential rate of around 2.5%, “as the transitory effects of the investment boom gradually dissipate”.
Fiscal performance is expected to improve with a primary surplus of around 5% in 2018–19.
“Public debt is thus expected to be on a firm declining path, falling below 70% of GDP by 2023, despite a sharp increase earlier this year following the resolution of the Cyprus Cooperative Bank.
The economic outlook could weaken if implementation of NPL resolution is delayed, while public debt sustainability could be undermined by realisation of contingent liabilities or erosion of fiscal discipline.”
Executive Directors welcomed the strong post-crisis economic recovery, which has supported large fiscal surpluses and lowered the unemployment rate.
Directors also welcomed the recent reforms undertaken to address key vulnerabilities in the banking sector, including the resolution of a large systemic state-owned bank.
Directors recommended strengthening regulatory guidance on loan restructuring and exercising vigilance over bank lending policies, the adequacy of provisioning, and debt-to-asset swap policies.
Directors noted that the transition to public insurance in
the health sector should be carefully managed.
Robust growth of the economy will lead to zero unemployment in two years, government spokesman Prodromos Prodromou said about the IMF’s Executive Board consultation.
Prodromou noted that the IMF approved the report by welcoming the strong – post-crisis - recovery of the Cypriot economy, which at a rate of 4.2% allows for significant fiscal surpluses and leads to a decrease in unemployment.
He added that the IMF welcomed the recent decisions taken by the Cypriot authorities to address vulnerabilities in the banking sector and that they referred to measures that the government has taken as regards the Co-operative Bank.
The spokesman said that while welcoming the government`s fiscal performance, with a record surplus of EUR 852.8 mln between January-October, the IMF notes that fiscal stability policy should be maintained.
“The government proceeds with a plan…with emphasis on the competitiveness of the Cypriot economy and the improvement of the growth model, so that we continue having positive reports and evaluations by the rating agencies,” said Prodromou.
He agreed NPLs constituted the biggest problem, but noted that according to the European Commission, Cyprus has recorded the greatest improvement.
Pointing out that Cyprus and Greece are the two countries of the Monetary Union with a high NPL rate, he said that the improvement achieved, following the Co-op sale, has led to a drastic reduction of the problem.
He added that with other tools, such as legislation and reforms, NPLs should drop further.
“During the recession there was no possibility to absorb NPLs while today, the rapid growth creates better conditions to address NPLs.”