NICOSIA, Cyprus – Cyprus’s economic reform program remains on track but authorities must maintain the momentum if the economy is to recover from its crippling banking crisis, the country’s international creditors said Thursday.
At the culmination of the second review into Cyprus’ financial rescue program, International Monetary Fund official and Cyprus mission chief Delia Velculescu said the country’s public finances are “comfortably” meeting set targets and reforms are proceeding normally.
She said Cypriot banks have made “significant progress” in replenishing their capital buffers and have moved ahead with their restructuring.
“In all, program implementation has been strong, but given risks ahead, continued full and timely implementation of the program remains essential,” Velculescu said in a teleconference.
Earlier Thursday, Cyprus Finance Minister Harris Georgiades said the government remains committed to fully implementing the bailout’s terms and that no new measures are needed to meet fiscal targets.
Georgiades said Cyprus isn’t yet out of the woods and that putting the country back into a growth trajectory will require more tough decisions.
“Despite the progress that has been made, difficulties and problems remain and the government won’t celebrate prematurely,” Georgiades told reporters.
One of the biggest problems facing Cypriot banks is the growing number of bad loans which the minister said need to be restructured to ease the burden on those who are having difficulty meeting their debt obligations in these tough economic times, as well as to keep lenders healthy. One measure could include extending the repayment periods.
Velculescu said restructuring those loans under a new legal framework will be essential in restoring depositor confidence and getting banks to loan out money to private businesses — an essential step to jump-starting a moribund economy.
She said Cyprus’ economy is projected to shrink by 7.7 per cent this year — a percentage point less than earlier estimates. However the contraction is projected to increase next year from 3.9 to 4.8 per cent.
Another major concern is falling disposable income and rising unemployment that’s projected to peak next year at just over 19 per cent.
The meeting with international creditors is a regular catch-up following March’s bailout of the country. In exchange for a 10 billion euros ($13.5 billion) loan from its partners in the 17-country eurozone and the International Monetary Fund, uninsured savers in the country’s two biggest banks were forced to take major losses.
The seized money was used to recapitalize Bank of Cyprus which also absorbed parts of the smaller, now-defunct Laiki Bank.
Amid ebbing trust, authorities slapped capital controls such as a 300 euro-a-day withdrawal limit to prevent a run on banks. Restrictions have since been partially relaxed, but many remain.
Georgiades repeated that almost all restrictions will be removed in the first few months of next year except the movement of money abroad that isn’t part of normal business activity. He said authorities will evaluate when it’s best to lift that final restriction according to how banks are holding up at that time.
The finance minister said authorities clinched a 90-day extension from international creditors on formulating a plan to privatize state-owned enterprises such as the telecommunications authority.
Under the terms of the program, Cypriot authorities must raise 1.4 billion euros ($1.87 billion) from such privatizations through 2018.
Georgiades said a plan will be in place by next month. Cypriot authorities want the extra time to ensure that such enterprises aren’t sold off on the cheap.
The next bailout cash disbursement to Cyprus of around 186 million euros ($248.6 million) is expected after creditors’ study the review’s findings by mid-December.