Brussels, 03/04/2014 (Agence Europe) - The International Monetary Fund has talked about risks surrounding implementation of the structural adjustment programme in Cyprus now that the DIKO party has left the coalition government due to disagreements about talks to reunify the small island and growing pressure from lobby groups and trade unions about the privatisation programme.
The troika of lenders (the European Commission, the European Central Bank and the IMF) have pointed out during all their monitoring mission that the Cypriot authorities have always firmly stuck to the terms of the aid programme such that the budget targets for 2013 have been beaten. The IMF says, however, that the departure of the DIKO party from the coalition at the end of February, however, “has compromised the government's parliamentary majority, weakening political support for program policies.”
In early March, the Cypriot government voted through a privatisation law, which had previously been rejected. The IMF says: “Resistance to privatization from labour unions and other interest groups is likely to intensify as assets are being prepared for sale and employment rights issues come to the fore. Regarding contingent liabilities, additional capital needs as a result of the AQR exercise and stress tests cannot be excluded. Finally, litigation risks remain due to the large number of legal claims associated with the resolution of Laiki and BoC, which could result in additional fiscal costs.”
Economic and Monetary Affairs Commissioner Olli Rehn said on Wednesday that the Cypriot authorities were introducing the programme's reforms with commitment and determination. He has always said that strong ownership of the process was the key to success. The IMF says: “There are factors mitigating the various macroeconomic and implementation risks. The implementation of the recent prior actions, together with other difficult decisions that were taken at the onset of the program, suggest that the authorities have maintained the ability to implement key program policies even under difficult political circumstances. The recapitalization of the financial sector under PIMCO's stringent assumptions ensures that financial institutions can withstand some further asset quality deterioration. At the same time, the sizeable program buffer could accommodate additional needs, including as a result of the AQR. As to litigation risks, the government has so far been successful in rejecting claims in district courts.'
Tough measures still need to be introduced to deal with insolvency and bad debt in the bank sector. Bad debts accounted for half of all Cypriot bank loans as at 31 December 2013. The troika demands changes to the law on house repossessions, which the government has promised to unveil by June this year. The IMF notes: “At the same time, to protect borrowers negotiating in good faith, the existing Code of Conduct aims to minimize repossessions and urges creditors to avoid legal proceedings when borrowers are cooperative. This is expected to discourage strategic defaults and provide incentives to borrowers to negotiate.”
The European Commission has published the first report by the Cypriot support group, which says that “Cyprus is committed to reforming its revenue administration to enhance its tax collection capacity and step up the fight against tax fraud and evasion, through the establishment of an integrated domestic tax department.” Cyprus is due to introduce a reform of the social security system by 1 July. (EL)