IMF disburses tranche, urges Cyprus to resume reforms

By Stelios Orphanides

The International Monetary Fund’s executive board approved the disbursement of a €126.3m tranche of bailout money to Cyprus after completing the ninth review of the country’s economic adjustment programme and encouraged the island to resume the stalled reform effort, address bad loans, and maintain fiscal discipline.

With the decision, the total disbursements to Cyprus rose to about €1bn, the IMF said in an emailed statement on Tuesday, adding that one more review of the Cypriot cash-for-reforms programme remains to be completed.

Mitsuhiro Furusawa, the IMF’s deputy managing director and acting chair, said that Cyprus’s macroeconomic achievements under the program supported by the IMF and the European Stability Mechanism, “have been favourable”.

“Economic and fiscal outcomes are better than expected, non-performing loans have stabilized, and bank liquidity has continued to improve,” Furusawa said. “However, with recent delays in implementing structural reforms, there is a need to re-energize reform implementation to protect confidence and longer-term growth. At the same time, public debt and non-performing loans need to be reduced from their current high levels”.

Cyprus should therefore press ahead with its privatisation programme and take concrete action to improve its business environment “while abstaining from relying on tax incentives” to strengthen growth, he said.

Speeding up efforts to reduce the bad loan stock in the banking system, seen at around 48 per cent of the total loan portfolio, will be “critical to reviving lending and improving growth prospects,” he said. “Following the recent passage of key legislation, the toolkit for debt restructuring is now largely in place. However, progress on the legal framework to facilitate securitization of loans and transfer of property title deeds in non-legacy cases should be accelerated”.

The restructuring of the co-operative banking sector according to an updated plan, as it continues to struggle with rising non-performing loans, “provides a sound basis for bolstering its long-term health,” Furusawa was quoted as saying. “More generally, efforts to enhance financial sector oversight should continue by strengthening the Central Bank of Cyprus’s governance and supervisory capacity”.

The IMF official encouraged Cyprus to remain prudent with respect to its public finances in the medium term in order to reduce its government debt to gross domestic product ratio while allowing room for “investment and social safety net spending” and to maintain a buffer for contingent liabilities.

“Prompt adoption of overdue reforms in tax administration, civil service employment, public financial management, and governance of state enterprises will strengthen fiscal performance and safeguard sustainability,” Furusawa added.