Brussels, 19/05/2014 (Agence Europe) - Representatives of the European Commission, the European Central Bank and International Monetary Fund (IMF) on the troika of lenders have again changed their macroeconomic forecasts for Cyprus after their fourth monitoring mission in the country, which ended over the weekend. The new forecasts paint a mixed picture. Recession will not be as bad this year as previously forecast (-4.2% rather than -4.8%), but recovery will not be as healthy as expected in 2015 (0.4% rather than 0.9% in the Spring Forecasts). The troika says that the better strength of the economy is signalled by the rise in confidence despite the high levels of unemployment and non-performing loans that are preventing banks from lending on to the real economy and thus hampering recovery because domestic demand has been curtailed by the need to reduce the high levels of debt. Hence the top priority is to reduce the non-performing loans and make changes to the bankruptcy and repossession rules. The draft legislation should be available in July and be balanced to allow restructuring agreements without causing undue hardship. The supervisory authorities have a role to play here and the Cypriot government is in the process of strengthening the rules to tackle money-laundering. The eurozone demanded an audit of implementation of the anti-money-laundering rules before it would agree to provide the island with financial aid last year.
A second challenge for Cyprus is to keep its public finances on track. It has met its targets in this connection, but caution is required in the light of the uncertain macroeconomic situation. The targets for the first quarter of 2014 were met by a comfortable margin, explains the troika. The third challenge will be to boost the country's institutions. Cypriots are preparing changes to the social security system, including a minimum wage and the civil service has been made more efficient. Strict implementation of the privatisation programme is key for reducing public debt, which is expected to over-shoot the 126% mark in 2015, according to the European Commission's Spring Economic Forecasts, which may not be up-to-date because of the reduction in the growth forecast for 2015. Progress in restructuring the banks has made it possible to remove many of the restrictions on the movement of capital within the country.
In early July, Eurogroup and the IMF will endorse disbursement of €600 million from the European Stability Mechanism and €86 million from the IMF. (EL)