The International Monetary Fund (IMF) has said that the progress made in resolving non – performing loans (NPLs) in the banking sector of Cyprus has been limited.
The growth momentum is strong and fiscal performance is robust, said a Concluding Statement on the preliminary findings of an IMF mission undertaken under Article IV of the Fund`s Articles of Agreement, but noted that challenges remained.
‘A set of legislative reforms aimed at addressing the crisis legacy of non-performing loans has been approved, catalysing the clean-up of bank balance sheets. Nevertheless, challenges remain. Risks have partially been transferred to the public sector as part of the bank clean-up strategy, but high debt will remain a burden on the private sector until NPLs, which constrain investor confidence and growth prospects, are resolved’, the IMF statement noted.
‘Notwithstanding the strong economic recovery, the Cypriot economy is weighed down by very high private and public debt. NPL ratios, while declining, are among the highest in Europe. The recent resolution of the government-owned Cyprus Cooperative Bank (CCB), the second-largest bank, and the passage of a long-delayed legislative package to strengthen the insolvency and foreclosure frameworks, have mitigated near-term risks to financial stability’, it said.
According to the IMF, growth is expected to exceed 4% in 2018–19, driven by domestic demand. Over the medium term, the IMF projected that growth would slow towards a potential growth rate of around 2,5%.
The Fund warned that ‘while NPLs have now partially shifted from the banking system to the public balance sheet as a result of bank clean-up operations, progress in resolving NPLs and in strengthening payment discipline is still limited. In this context, delays in NPL resolution will continue to weigh on investor sentiment and growth potential until they are adequately addressed’, it said.
The Statement identified as key policy priorities a further private and public balance sheet repair by steadfastly implementing the recently amended legal tools to lower NPLs and the private debt overhang; safeguarding fiscal space and reducing risks to public debt sustainability by maintaining strict spending discipline; and enacting structural reforms, especially in the judiciary and public administration, to attract further investment and enhance productivity. ‘These policies are critical to reduce vulnerabilities and reinvigorate medium-term growth potential’, it added.
The Fund also pointed out that the supervisory and governance framework for credit-acquiring companies—which includes the newly-established Cyprus Asset Management Company (CAMC) needs to be strengthened. ‘To maximize recovery and contain fiscal costs, the governance framework for the government-owned CAMC needs to adequately balance operational independence with public accountability and transparency, with a clear mandate accompanied by operational targets, an independent board, and skilled management compensated based on performance’, the Statement noted.
Furthermore, it underlined that the proposed subsidy scheme (Estia) to encourage distressed borrowers to begin servicing their loans should be better targeted to those most in need of assistance and suggested tighter eligibility criteria and clearer communication to avoid moral hazard that would further erode payment discipline by extending benefits to those already capable of servicing their obligations.