Cyprus: Second Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Performance Criteria

Publication Date: December 23, 2013
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Summary: EXECUTIVE SUMMARY Extended Arrangement: On May 15, 2013, the Executive Board approved a three-year Extended Arrangement under the Extended Fund Facility in the amount of SDR 891 million (563 percent of quota; about €1 billion). Two purchases of amounts equivalent to SDR 74.25 million (about €86 million) each have been made so far, and another purchase of the same amount is proposed to be released upon completion of the second review. The European Stability Mechanism has released €4.5 billion since the program approval (of €9 billion committed). Recent Economic Developments: The recession through September, though deep, has not been as large as expected. Private consumption has been relatively resilient, economic sentiment continues to improve, and exports, including tourism, have held up. Nevertheless, the situation remains difficult, with unemployment on the rise and disposable incomes falling. Banks are curtailing credit as asset quality continues to deteriorate, and private sector indebtedness remains very high. In this context, the growth forecast for 2013 has been revised upwards modestly, but a deeper contraction in 2014 is now envisaged, consistent with a more gradual private sector deleveraging process. Policy Implementation: The program is on track. Fiscal performance continued to exceed targets comfortably, and the 2014 budget is more ambitious than envisaged at program approval. All structural benchmarks were met, albeit with a modest delay in one case. Significant progress has been made in restructuring and recapitalizing the banking sector, including with foreign participation in the share capital of one domestic bank. Looking forward, efforts must concentrate on ensuring full implementation of banks’ restructuring plans to clean up balance sheets and pave the way for a return of credit to the private sector. Fiscal structural reforms are proceeding, but strong resolve is needed to kick-start the privatization process. The program remains subject to large uncertainty given lingering financial sector vulnerabilities and continued challenges to policy implementation.
Series: Country Report No. 13/374
Subject(s): Extended Fund Facility | Fiscal policy | Fiscal reforms | Tax administration | Banking sector | Bank restructuring | Bank supervision | Economic indicators | Debt sustainability analysis | Staff Reports | Press releases | Performance criteria modifications | Cyprus

Publication Date: December 23, 2013
ISBN/ISSN: 9781475551839/1934-7685 Format: Paper
Stock No: 1CYPEA2013003 Pages: 133
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