NICOSIA, Cyprus – Cyprus’ finance minister said Saturday that international creditors have given a fourth straight positive review to the country’s financial rescue program and are projecting that its economy will shrink this year slightly less than earlier forecasts.
But the European Union and the International Monetary Fund said high unemployment and a continuing credit crunch means that a return to growth in 2015 will be weaker than anticipated.
Harris Georgiades said the economy will contract 4.2 per cent of gross domestic product in 2014, 0.6 per cent better than an earlier projection. The Cypriot economy also performed better than expected in 2013, despite a 10 billion-euro ($13.7 billion) rescue in March that mandated a seizure of uninsured deposits in the country’s two biggest banks and shut down its second-largest lender.
Almost all capital controls imposed in the wake of the rescue have been lifted, but controls on transferring money abroad remain in place; authorities hope to lift those by year’s end.
“The Cyprus economy has proven to be more resilient than many had expected and that’s mainly due to its main sectors of tourism, services and shipping,” Georgiades told reporters.
Georgiades said Cyprus’ strict adherence to the terms of the rescue from other eurozone countries and the IMF is working. He said the country remains on track to get its economy growing again in 2015 with help from the European Investment Bank and the European Bank of Reconstruction and Development.
But difficulties remain, including a weakened banking sector that is still struggling with a significant number of bad loans.
Creditors said the banks’ bad-loan burden is hindering them from supplying credit to businesses that’s essential to spurring growth. As a result, growth projections for next year have been revised from 0.9 per cent to 0.4 per cent of GDP.
The finance minister said authorities are working on a legal framework that would empower banks to collect from “unco-operative” borrowers while helping those having trouble paying back home loans.
Creditors also urged the government to push ahead with privatizations of state-owned companies and to continue to fully comply with the terms of the rescue “given still high risks.”
Georgiades said the Cyprus expects the next bailout tranche of over 600 million euros ($821.8 million) that will boost public finances and refinance debt by the end of June.