IMF Mission Chief for Cyprus
November 4, 2014
As prepared for delivery
- The outlook for the global economy, as covered in the IMF’s recent World Economic Outlook (WEO), remains subdued. The global recovery continues, but more slowly than anticipated, and the forecast for the world economy has been revised down.
- Recent economic developments in Cyprus, as outlined in the recent
report on the IMF’s Article IV Consultation for Cyprus (available at
imf.org), have been generally encouraging, with growth expected to turn
positive in 2015. Growth should continue to gradually recover in the
coming years, although to levels below those Cyprus experienced before
the global crisis.
- Public finance developments have been encouraging, with the
budget deficit falling more quickly than projected. However, public debt
is still high, and continued efforts to strengthen public finances will
be necessary to steer public debt on a sustainable downward path, which
over time will create more room for maneuver in public finances, and
should contribute to lower interest rates in Cyprus.
- Cyprus has made great progress on its reform program since last
year, and continuing these reforms will be critical to ensuring a
sustained recovery of growth in the economy and jobs...
- It will be particularly important for Cyprus to address the
rising level of non-performing loans (NPLs), which now stand at close to
50 percent for the banking system as a whole. This level of NPLs is
high by any standard, and is higher than what can be explained by the
recession or increase in unemployment. The NPLs place a heavy burden on
the economy because it is very difficult for financial institutions to
provide new lending when it is likely they won’t get paid back. But new
lending for individuals and businesses is necessary to support
investment and other economic activities. Thus, solving the NPL problem
is necessary to get growth going and boost the number of jobs.
- The authorities have a strategy for turning around the rise in NPLs focused on a reform of the framework for debt-restructuring. The first step is the modernization of foreclosure legislation. The recent legislative changes are a step forward and implementation will be important. The second step is a modernized insolvency or bankruptcy framework that would allow debtors to either restructure their loans, or for those that truly cannot pay, allow for a “fresh start”. Both of these steps taken together will encourage banks and borrowers to move more quickly to solutions, all of which will allow a speedier clean up of old loans, which will then create room for new lending. Of course, it will be very important to pair these changes with effective implementation of the new safety-net reform that is being phased in. This new guaranteed minimum income system will be critical to reducing poverty and protecting those most in need.
