International Monetary Fund says Cyprus will need more spending cuts to meet bailout targets

NICOSIA, Cyprus – Cyprus’ president on Wednesday rebuffed an International Monetary Fund assessment that Cyprus will need to make additional spending cuts to meet a key target of its financial rescue program.

IMF official Delia Velculescu said that more permanent cuts to government spending, including the public sector wage bill, are needed for authorities to achieve a primary surplus of four per cent of gross domestic product by 2018. A primary surplus does not count the cost of servicing existing debt.

But President Nicos Anastasiades said that Cyprus would be under no obligation to follow any assessment by its international creditors as long as it remains steadfast to the terms of its 10 billion-euro ($13.4 billion) bailout.

“I want to assure you that with the progress we’ve made so far, I believe that we’ll be in a position to resist and to avoid whichever recommendations that may point to further cuts,” Anastasiades said.

Anastasiades also said that Cypriot authorities “emphatically” turned down the IMF’s recommendation for more cuts during bailout talks.

The surplus is seen as key to rolling back Cyprus’ public debt which is now around 120 per cent of GDP. According to the program terms, public debt must fall to around 100 per cent of GDP by 2020.

With Cyprus on the verge of bankruptcy, a joint IMF-European Union rescue package agreed in March 2013 forced uninsured deposits in the country’s two largest banks to be seized in order to recapitalize the bigger Bank of Cyprus. The smaller lender, Laiki, was shut down and parts of it absorbed by Bank of Cyprus.

Velculescu said Cypriot authorities made “impressive progress” in tackling the country’s economic woes with measures including a package of spending cuts backed up by revenues that amounted to around 7 per cent of GDP. However, the IMF said in a staff report that more savings could be made by eliminating automatic pay rises for government workers before a wage freeze expires in 2016, better linking pay with performance and reforming the education sector and pensions.

Velculescu said the country must revise its foreclosure legislation to tackle the high number of bad loans — over half of all loans — that are holding back economic growth.

She said the IMF expects the Cabinet-approved legislation to pass since it’s a condition of the rescue program. But some political parties have openly opposed it over fears that people who lost jobs or saw their income dwindle in the wake of the bailout will lose their homes.

Anastasiades moved to ease those fears putting the legislation’s approval into question by outlining several steps in a nationally televised address Wednesday. One step allows borrowers to seek court protection. Another envisions the government buying the homes of low-income or jobless people who can’t make loan payments and letting them live there as renters until they’re able to buy it back.

Velculescu said in case the parliament votes down the legislation before a September 1st deadline, international creditors would have to return to the country to discuss with authorities how to proceed.

The next batch of rescue money — 350 million euros ($470 million) from the EU and 86 million euros ($115.5 million) from the IMF — is set to be released in late September.