IMF Staff Completes Mission for the First Post-Program Monitoring to Cyprus

IMF News, April 3, 2017

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IMF mission visited Nicosia during March 27–31, 2017, for the first post-program monitoring (PPM) discussions since Cyprus exited the Extended Arrangement under the Extended Fund Facility.
Since exiting the IMF program one year ago, Cyprus’s economic recovery has gathered momentum, banks’ liquidity positions have improved, the restructuring of nonperforming loans (NPLs) has accelerated, and the fiscal primary surplus has increased.
Continued very high levels of private sector indebtedness, nonperforming loans and general government debt remain vulnerabilities.

For 2017, GDP growth is forecast at around 2.5 percent on continued support from foreign demand and external financing.
Thereafter, growth is expected to ease marginally as repayment of private sector debt picks up, stabilizing at just above 2 percent from 2020.
Under these conditions, capacity to repay the Fund is expected to be satisfactory, supported by sizable fiscal primary surpluses, the back-loaded maturity profile of official debt and possible further operations to smooth redemptions of market-based debt.
Repayment capacity would be weakened in the event of:
- a new boom-bust growth cycle,
- erosion of fiscal discipline,
- materialization of risks in banks’ balance sheets.

Very high NPLs remain, with a portion of previously restructured loans tending to re-default.
NPLs weaken banks’ profits and progress across banks has been uneven due to differences in loan portfolio structures, use of legal and other tools, and banks’ capacities to manage NPLs.
Operational barriers to NPL resolution include:
- regulatory incentives encouraging banks to delay recognition of losses or disposal of collateral,
- remaining impediments in the legal framework,
- capacity constraints in the courts.
Newly-issued bank lending supports the economy, but should be underpinned by robust lending policies, strong business plans from borrowers and close monitoring of credit risk.

Accelerating NPL workouts and reducing excessive debt burdens
- Encourage banks not to defer restructuring in expectation of autonomous improvements from output and property price increases.
- Focus on durable and sustainable loan work-outs, including solutions that reduce a borrower’s debt to affordable levels.
- Address operational barriers to NPL resolution (regulatory incentives, legal impediments, court capacity).
Frontloading public debt reduction
- Target a primary surplus of 3 percent of GDP (on a cash basis) for the next several years while saving any over-performance and directing additional resources to growth-enhancing investment.
- Guard against fiscal slippages, including from the envisaged national health service as well as from wage and social benefit spending.
- Restart the privatization program to contribute to lowering public debt.
- Complete pending reforms in revenue administration and public financial management, and adopt the package of civil service reform bills.
Reinvigorating structural reforms
- Expedite judicial reform to strengthen legal enforcement of commercial claims and speed up court procedures.
- Restart the privatization program to increase economic efficiency and competition.
- Streamline business procedures to attract new service sectors and create sustainable employment opportunities.

The IMF mission coordinated with the post-program surveillance activities of the European Commission and the European Central Bank, and the early warning system of the European Stability Mechanism.
The IMF mission expressed thanks to the Cypriot authorities, European partners and private sector counterparts for informative discussions, cooperation and hospitality.

Press Release No. PR17/107, April 3, 2017.