## _cr1492

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### Executive summary — program status and financing
- Extended Arrangement approved May 15, 2013: SDR 891 million (563 percent of quota; about €1 billion).
- Purchases: three purchases of amounts equivalent to SDR 74.25 million (about €86 million) each made so far; another purchase of the same amount proposed upon completion of the third review.
- European Stability Mechanism: €4.6 billion of €9 billion committed has been released; a disbursement of €150 million expected in early April.
- Staff recommendation: support completion of the third review and proposed modifications to performance criteria.

### Recent macroeconomic developments — output, prices, and demand
- 2013 growth outturn: staff estimates range of -6 percent; flash outturn perhaps -5.3 percent (better than projected -7.7 percent).
- Q4 2013: output fell by about 1 percent q-o-q and 5.3 percent y-o-y.
- HICP inflation: averaged 0.4 percent in 2013 (projected 0.8 percent); inflation turned negative in October and reached -1.3 percent in February.
- Core inflation: -0.7 percent in January.
- GDP deflator: decline of about 1.5 percent in the first three quarters, driven by public sector compensation cuts and falling capital goods prices.
- Demand indicators: retail and cement sales suggest moderation in the fall of private consumption and investment in Q4; imports' decline moderated and exports contracted modestly.

### Labor market and competitiveness
- Compensation per employee: fell by 6.1 percent y-o-y in 2013.
  - Public sector: estimated decline of 9.4 percent.
  - Private sector: estimated decline of 5.3 percent.
- Employment: total employment declined by 5.2 percent during 2013 (projected decline was 6.3 percent).
- Unemployment: 17.2 percent in December 2013.
- Youth unemployment: 40.2 percent in December 2013.
- Unit labor costs: declined, falling well below the EA average.
- Sectoral notes: tourism receipts outperformed expectations; construction activity remains depressed but may have bottomed out in Q3.

### External sector and balances
- Current account: small surplus of 0.3 percent of GDP in the first three quarters of 2013 (vs. deficit of 5.7 percent of GDP in same period 2012).
- Imports: plummeted by 15.7 percent y-o-y.
- Exports: declined by about 4.4 percent y-o-y; rising goods exports and tourism partly offset declines in other services.
- Q3 2013: trade balance improved; current account surplus reduced by negative income flows from lower returns on assets abroad.
- External competitiveness: real effective exchange rate indicators show improvement.

### Fiscal developments and outlook
- 2013 general government primary deficit (cash basis): reached 1.7 percent of GDP (projected adjusted target 3.2 percent of GDP).
- Revenues: higher than expected by 0.5 percent of GDP (higher social contributions and one-off EU transfers).
- Primary spending: lower than targeted by about 1 percent of GDP (smaller wage bill, across-the-board cuts, lower capital expenditure execution).
- January 2014 primary balance: surplus of about 1 percent of GDP (0.6 percent of GDP better than programmed).
- Noted tax changes: higher corporate income tax rates, higher tax on interest income, and higher property taxes contributed to revenue resilience.
- 2014 primary deficit target reduced from 3.3 to 2 percent of GDP (reflects 0.7 percent of GDP permanent savings in 2013 and additional 0.6 percent of GDP expected central bank dividends).
- Authorities committed to preserve end-2013 level of short-term debt; treasury bills declined by about €240 million (1.4 percent of GDP) relative to program start.

### Program implementation, conditionality, and monitoring
- All end-December and continuous performance criteria (PCs) met; compliance with structural conditionality mixed.
  - Met: cooperative sector valuation and restructuring SB; recapitalization of coop sector; SB on strengthening AML-related supervision of banks.
  - Not met on time: structural benchmarks on legislation on budget systems and privatization (eventually fulfilled as prior actions for the third review); entrusting voting rights of legacy Laiki’s equity stake in BoC to an independent entity was requested to be delayed.
- Proposed changes: modifications of four end-March PCs (general government primary balance; primary expenditure; stock of general government debt; accumulation of guarantees) and six new SBs for the third review.
- Reporting: extensive data and reporting requirements set with specified frequencies and maximum time lags.

### Financial sector stabilization, recapitalization, and NPLs
- Cooperative sector recapitalization: state injected €1.5 billion in early March; post-recapitalization sector capital estimated to reach 16 percent of risk-weighted assets.
- NPLs (core domestic sector): reached 50 percent of total loans (€22 billion, or 135 percent of GDP) at end-December.
  - NPL composition: about 60 percent corporate; half of corporate NPLs in construction/real estate; household NPLs roughly equally housing and consumer loans.
- Provisions: about 30 percent of NPLs (below European peers' average of 50 percent).
- Loans net of provisions: €11.5 billion, or about 70 percent of GDP (compared to 94 percent of GDP in 2012); expected to decline to 64 percent of GDP by 2016.
- Banks’ capital and liquidity: BoC recapitalized in July 2013; BoC reduced operational costs by 42 percent; system deposits fell €10.3 billion (18 percent) between end-March 2013 and end-February 2014 (excluding bailed-in amounts).
- Credit contraction: non-financial private sector credit fell about 10 percent y-o-y in January (6 percent for residents); corporate credit fell by 12½ percent (5 percent for residents); household credit declined by 7 percent.
- Bank Lending Survey: declines due to weak supply and demand; in Q4 tightening of credit standards and decline in household credit demand slowed.
- Specialized workout units and arrears management: BoC and coops to establish specialized units; CBC to assess operational preparedness and enhance reporting and supervision.

### Capital markets, liquidity, and deposit trends
- Government bond yields: fell from close to 20 percent in July 2013 to about 6 percent in March 2014.
- Sovereign rating: S&P upgraded Cyprus in November 2013 to B-.
- Deposit dynamics: aggregate deposits (excluding bailed-in amounts) declined by €10.3 billion (18 percent) between end-March 2013 and end-February 2014.
- System-wide weekly net outflows: declined to about 10 percent of levels seen April–July 2013.
- Recent relaxations:
  - Release at end-January of €0.9 billion out of €3 billion blocked in BoC.
  - Abolition of automatic renewal of maturing term deposits and increase in limits for domestic transfers in mid-February.
  - Maturity profile of deposits shortened.
  - Parliament approved up to €2.9 billion of government guarantees to back possible BoC bond issuance for Eurosystem collateral.

### Credit-less recovery assessment and investment financing
- Probability of a credit-less recovery estimated at 78 percent given a peak-to-trough expected contraction in output of 13.3 percent.
- Estimated free cash flow for whole economy that could be invested: close to €2 billion (of which €1.6 billion from select sectors).
- Staff conservative investment projection for 2014-15: €1.5-1.6 billion.
- Expected financing of private fixed investment: free cash flow 50 percent; FDI 30 percent; bank loans 20 percent.
- Sectors likely to lead a credit-less recovery: tourism, industry, communication, agriculture, and professional services (together accounting for 30 percent of GVA).

### Macroeconomic outlook and selected projections (selected indicators)
- Real GDP (percent change): 2013 -6.0; 2014 -4.8; 2015 0.9.
- HICP (period average): 2013 0.4; 2014 0.4; 2015 1.4.
- Unemployment rate EU standard (percent): 2013 16.0; 2014 19.2; 2015 18.4.
- Government balance (percent of GDP): 2013 -2.0; 2014 -2.4; 2015 -2.4.
- Current account balance (percent of GDP): 2013 -1.5; 2014 0.1; 2015 0.3.

### Risks, shock scenarios, and debt sustainability
- Downside risks highlighted:
  - Change in depositor sentiment upon relaxation of payment restrictions.
  - Risk of a deflationary spiral with prolonged price declines.
  - Continued deleveraging, tighter company liquidity, exhaustion of consumer buffers.
  - Ukraine crisis risk of non-resident deposit capital flight.
  - Political risks from breakup of ruling coalition and resistance to reforms.
- Public debt projections:
  - Public debt revised to 112 percent of GDP in 2013; 121.5 percent of GDP in 2014.
  - Baseline: debt peak around 125.8 percent of GDP in 2015; decline toward around 104.5 percent of GDP by 2020 (selected historical/projection sequence: 63.5, 71.1, 85.5, 112.0, 121.5, 125.8, 122.5, 116.1, 111.6, 107.9, 104.5).
- Adverse scenarios:
  - More protracted recession → debt rising toward 130 percent of GDP by 2020.
  - Deflation shock in 2014 → higher long-run debt level.
  - Deeper recession + higher banking contingent liabilities → could exhaust program buffer and push debt up to about 170 percent of GDP by 2015, falling to around 150 percent of GDP by 2020; would likely require additional financing measures and commitments from European partners.
- Gross financing needs 2016–2020: about €8 billion.

### Bank and cooperative sector restructuring — measurable progress
- Cooperative consolidation: "85 out of 93 coops having been merged into 16 new institutions by end-February."
- Recapitalization and restructuring:
  - CCB fully recapitalized by state in early March with €1.5 billion to achieve CET1 of 9 percent on consolidated basis through 2017.
  - CCB to use recapitalization to restore solvency of individual CCIs up to 4 percent CET1; precondition: 93 CCIs agreed to merge into 18 new institutions.
  - Restructuring actions through 2017 include centralizing loan restructuring, voluntary redundancy schemes, pay-scale harmonization, branch reductions from 349 to 239 through 2015, and disposal of noncore businesses.
- BoC measures:
  - Reported progress in cost cutting; agreement to sell Ukrainian subsidiary (sale not yet closed).
  - BoC to submit quarterly reports on restructuring implementation; CBC to reassess BoC’s plan after first year.

### Legal framework, arrears management, and operational readiness
- Identified legal deficiencies: ineffective foreclosure and debt enforcement (foreclosures reportedly taking up to 20 years; title deed issuance up to ten years); outdated insolvency laws; backlogs in title deed issuance; unregistered land sale contracts creating conflicts.
- Authorities’ commitments:
  - Develop comprehensive reform strategy by end-May covering foreclosure procedures, insolvency, and institutions.
  - Legislative milestones: amend foreclosure legislation by end-June to facilitate private auctions; submit corporate and personal insolvency amendments to parliament by end-2014.
  - CBC to assess operational preparedness for implementing new Code of Conduct and Arrears Management Framework: by end-March for banks (existing SB); by end-May for coops (new SB); finalize assessment of arrears management policies by end-June.
  - Enhance reporting on asset quality and step up on-site and off-site monitoring.
- Private sector debt and NPL statistics:
  - Household bank debt: 134 percent of GDP at end-December 2013.
  - Corporate bank debt: 142 percent of GDP at end-December 2013.
  - NPLs in domestic banking sector: 135 percent of GDP (€22 billion) at end-December 2013; of which 55 percent of GDP (€9 billion) households and 80 percent of GDP (€13 billion) corporates.

### Fiscal structural reforms and social protection
- Social welfare reform (Guaranteed Minimum Income, GMI):
  - Initial costing estimates under different assumptions could amount up to ¾ percent of GDP.
  - Final design to be subject to public consultation and government approval (existing SB); roll-out target end-June (existing SB) though IT-related delays possible.
  - Staff suggested IT pilot test before full roll-out.
- Revenue administration:
  - Integrated revenue administration plan adopted; enabling law to transfer powers to new integrated tax department to be submitted to parliament by end-April (new SB).
  - Indicative targets for joint audits and large/high-risk taxpayer audits set for 2014.
  - Tax arrears estimated over €1 billion (7 percent of GDP) at end-2013; authorities to prepare comprehensive tax debt-recovery plan.

### Program financing, IMF purchases, and capacity to repay
- Gross financing requirement including buffer (May–Dec 2013): 5,845.3 (Millions of euros).
  - Government component (May–Dec 2013): 3,389.1 (Millions of euros) — fiscal deficit: 816.8; debt maturities: 2,572.3.
  - Banks recapitalization/support: 1,500.0 (Millions of euros).
  - Market financing planned: 776.2 (Millions of euros).
  - Net financing requirement (2013): 5,069.1 (Millions of euros).
  - Official financing sources and buffers (2013): 4,843.4 (Millions of euros): IMF 258.4; ESM 4,585.0.
- IMF purchases schedule: repeated purchases of 74.25 (Millions of SDR / 46.93% of Quota) across scheduled review dates totaling 891.00 (Millions of SDR) / 563.21 percent of quota.
- Exposure to the Fund peaks in 2016 at 563 percent of quota or 6.1 percent of GDP.
- Program expected to be fully financed through next 12 months via ESM/IMF disbursements (about €2.5 billion), expected central bank dividends (€200 million by end-April), and government deposits (about €1 billion at end-2013).
- Authorities aim for a CBC debt-to-asset swap of about €1 billion by mid-2014 to lower public debt.

### Staff appraisal, priorities, and sequencing
- Staff: authorities showed resolve; macro outcomes exceeded expectations and fiscal targets met with margins.
- Key priorities:
  - Further stabilize financial sector: implement restructuring plans, address NPLs, normalize payment flows.
  - Maintain fiscal prudence and flexibility given macro uncertainty and contingent liabilities.
  - Accelerate structural reforms: privatization, insolvency and foreclosure reform, revenue administration, social welfare rollout, public administration reform.
- Safeguards and sequencing emphasized: gradual relaxation of capital controls per milestone-based roadmap with monitoring; prudent use of liquidity buffers; enhance communication and coordination between Ministry of Finance and CBC.
- Conditionality and monitoring: continue quarterly PCs, reviews, and structural benchmarks; proposed new and modified PCs/SBs to be met for third review completion.

*International Monetary Fund — selected excerpts from staff report and Letter of Intent contained in _cr1492 (March 13, 2014).*

### EXECUTIVE SUMMARY

### _cr1492 - EXECUTIVE SUMMARY

### Extended Arrangement and Financing
- Extended Arrangement approved May 15, 2013: SDR 891 million (563 percent of quota; about €1 billion).
- Purchases: three purchases of amounts equivalent to SDR 74.25 million (about €86 million) each have been made so far; another purchase of the same amount proposed to be released upon completion of the third review.
- European Stability Mechanism: €4.6 billion of €9 billion committed has been released; a disbursement of €150 million expected in early April.

### Recent Economic Developments — Output, Prices, and Demand
- 2013 growth outturn: staff estimates the 2013 growth outturn in the range of -6 percent, significantly better than the projected -7.7 percent; the flash outturn signals that the result could be even better, perhaps -5.3 percent.
- Fourth quarter 2013: output appears to have fallen by about 1 percent q-o-q and 5.3 percent y-o-y.
- Adjustment noted through both quantities and prices: smaller-than-expected adjustment of quantities but larger-than-forecasted adjustment of prices.
- HICP inflation: averaged 0.4 percent in 2013, against a projected 0.8 percent; inflation turned negative in October and reached -1.3 percent in February.
- Core inflation: stood at -0.7 percent in January.
- GDP deflator: decline of about 1.5 percent in the first three quarters, mostly due to compensation cuts in the public sector and falling prices of capital goods.
- Demand indicators: retail and cement sales suggest moderation in the fall of private consumption and investment in Q4; imports' decline moderated and exports contracted modestly.

### Labor Market and Competitiveness
- Compensation per employee: fell by 6.1 percent y-o-y in 2013.
  - Public sector compensation per employee: estimated decline of 9.4 percent.
  - Private sector compensation per employee: estimated decline of 5.3 percent.
- Employment: total employment declined by 5.2 percent during 2013 (projected decline was 6.3 percent).
- Unemployment: reached 17.2 percent in December 2013.
- Youth unemployment: 40.2 percent in December 2013.
- Unit labor costs: have declined, falling well below the EA average.
- Tourism and construction: tourism receipts outperformed expectations; construction activity remains depressed but may have bottomed out in Q3.

### External Sector and External Balances
- Current account: small surplus of 0.3 percent of GDP in the first three quarters of 2013, compared to a deficit of 5.7 percent of GDP during the same period in 2012.
- Imports: plummeted by 15.7 percent y-o-y, reflecting contraction in domestic demand.
- Exports: declined by about 4.4 percent y-o-y; rising exports of goods and tourism partly offset decline in other service exports.
- Q3 2013: trade balance continued to improve; current account surplus declined because of negative income flows related to lower returns on investment assets abroad.
- External competitiveness: real effective exchange rate indicators show improvement.

### Fiscal Developments and Outcomes
- 2013 general government primary deficit (cash basis): reached 1.7 percent of GDP, compared to projected adjusted target of 3.2 percent of GDP.
- Revenues: higher than expected by 0.5 percent of GDP (due to higher social contributions and one-off transfers from the EU budget).
- Primary spending: lower than targeted by about 1 percent of GDP (smaller wage bill from higher redundancies — about 1,600 relative to a target of 1,000; across-the-board cuts in goods and services; lower execution of capital expenditures).
- January 2014: primary balance reached a surplus of about 1 percent of GDP, 0.6 percent of GDP better than programmed.
- Noted tax changes: increases in rates of the corporate income tax, the tax on interest income, and property taxes contributed to revenue resilience.

### Program Implementation and Structural Conditionality
- Program status: overall remains on track; all end-December and continuous performance criteria (PCs) were met, in some cases with significant margins.
- Structural conditionality: compliance mixed.
  - Met: structural benchmark on preconditions for injection of state aid in the cooperative sector; cooperative sector recapitalized; SB on strengthening AML-related supervision of banks met.
  - Not met on time: remaining structural benchmarks related to legislation on budget systems and privatization (eventually fulfilled as prior actions for the third review); structural requirements to combat tax evasion implemented as a prior action; authorities requested more time to entrust voting rights of legacy Laiki’s equity stake in Bank of Cyprus to an independent entity.
- Policy focus going forward: dealing with high level of non-performing loans (NPLs), further normalizing payment flows, maintaining fiscal prudence, and stepping up implementation of the ambitious fiscal structural reform agenda.

### Financial Sector and Risks
- Banking sector: signs of stabilization are emerging, but rising unemployment, falling credit, and increasing non-performing loans pose challenges.
- Risks to program implementation: remain significant, including remaining financial sector vulnerabilities and diminished political support following the breakup of the governing coalition.
- European policy support: ECB accommodative stance and collateral policies are helpful; Cyprus could benefit from further ECB action to reduce financial fragmentation and relax collateral requirements.
- European mechanisms: upcoming Single Resolution Mechanism (SRM) and Single Supervisory Mechanism (SSM) expected to strengthen supervision of Cypriot banks; additional European backstops, such as ESM direct recapitalization, could help reduce concerns should negative risks materialize.

### Political Context and Mission
- Political dynamics: breakup of the governing coalition after DIKO left the government, complicating advance of reform agenda (notably privatization and insolvency legislation) amid intensified opposition from labor unions and vested interests.
- Central Bank governance: Central Bank Governor announced resignation on March 10; new Governor appointed and will assume duties on April 11.
- Mission: discussions held in Nicosia during January 29 - February 11; mission met with Minister of Finance, Governor of the Central Bank of Cyprus, other Cabinet Ministers, members of Parliament, party leaders, union representatives, and private sector representatives; staff worked with representatives from the European Commission and the European Central Bank.

*International Monetary Fund — EXECUTIVE SUMMARY (March 13, 2014).*

### 8.      Capital market conditions have improved. Government bond yields have fallen from close

### _cr1492 - 8.      Capital market conditions have improved. Government bond yields have fallen from close

### Capital market conditions
- Government bond yields fell from close to 20 percent in July 2013 to about 6 percent in March 2014, reaching levels seen in May 2011.
- Improvement reflects: good performance under the program; better-than-expected domestic macroeconomic outcomes; and, to some extent, improving conditions in other European peripheral countries (where yields have fallen by about 30-120 bp during the same period).
- Cyprus’s sovereign yield curve has recently dis-inverted, suggesting markets have scaled down the near term probability of default.
- Sovereign credit rating: S&P upgraded Cyprus in November 2013 to B-, broadly in line with Greece’s, but below Portugal and Ireland.

### Deposits, liquidity, and payment restriction relaxations
- Between end-March 2013 and end-February 2014, aggregate deposits (excluding bailed in amounts) declined by €10.3 billion, or 18 percent of the total.
- System-wide average weekly net outflows have declined to about 10 percent of those observed in the immediate aftermath of the crisis (April-July).
- Stabilization is broad based: resident and non-resident deposits; domestic and foreign banks.
- Recent relaxations and actions:
  - Release at end-January of €0.9 billion out of €3 billion previously blocked deposits in Bank of Cyprus (BoC).
  - Termination of automatic renewal of fixed term deposits upon maturity and increase in limits for domestic transfers implemented in mid-February.
  - Maturity profile of deposits has shortened.
  - BoC potential liquidity buffers were boosted by Parliament approval of up to €2.9 billion of government guarantees for eventual issuance of BoC bonds to be used as collateral against Eurosystem liquidity.

### Recapitalization and non-performing loans (NPLs)
- Government injected €1.5 billion into the coop sector in early-March, completing recapitalization of the core domestic financial sector.
- Post-recapitalization, sector capital estimated to reach 16 percent of risk-weighted assets.
- NPLs for the core domestic sector reached 50 percent of total loans (€22 billion, or 135 percent of GDP) at end-December.
- NPL composition:
  - About 60 percent of NPLs are in the corporate sector; half of corporate NPLs are in the construction/real estate sector (which also exhibits the highest incidence of NPLs).
  - Household NPLs roughly equally distributed between housing and consumer loans.
- NPL trajectory aligns broadly with PIMCO’s adverse scenario, projecting a continued increase toward 60-70 percent by mid-2015.
- Provisions are about 30 percent of NPLs, below the average of 50 percent of European peers.

### Credit dynamics and lending conditions
- Non-financial private sector credit fell by about 10 percent y-o-y in January (6 percent for residents).
  - Corporate credit fell by 12½ percent (5 percent for residents).
  - Household credit declined by 7 percent (both residents and non-residents).
- Bank Lending Survey indicates declines due to both weak supply and weak demand; in Q4 tightening of credit standards and decline in household credit demand slowed somewhat.
- Lending rates have been declining in recent months.

### Macroeconomic outlook and selected projections
- 2014 growth projection maintained at -4.8 percent.
  - Recovery expected to be modest, projected to take hold by mid-2015, and likely to be credit-less, led by tourism and other service sectors.
- Revisions for 2014:
  - Unemployment rate revised down to 19.2 percent from 19.8 percent.
  - Inflation lowered to 0.4 percent from 1 percent.
- Current account:
  - 2013 current account deficit projected to reach 1.7 percent of GDP.
  - 2014 current account revised from a small surplus to broad balance.
- Selected economic indicators (Percent change, unless otherwise indicated / Percent of GDP):
  - Real GDP: 2013 -6.0; 2014 -4.8; 2015 0.9
  - Consumption: 2013 -7.2; 2014 -5.3; 2015 -0.1
    - Private consumption: 2013 -7.5; 2014 -6.3; 2015 0.7
    - Public consumption: 2013 -6.0; 2014 -1.5; 2015 -2.7
  - Fixed investment: 2013 -24.0; 2014 -18.1; 2015 1.3
  - Inventory accumulation (contribution to growth) 2013 1/-1.2; 2014 0.0; 2015 0.0
  - Foreign balance (contribution to growth) 2013 5.0; 2014 1.9; 2015 0.8
  - HICP (period average): 2013 0.4; 2014 0.4; 2015 1.4
  - Unemployment rate EU standard (percent): 2013 16.0; 2014 19.2; 2015 18.4
  - Employment growth (percent): 2013 -5.6; 2014 -4.5; 2015 0.8
  - National saving (percent of GDP): 2013 10.0; 2014 10.1; 2015 10.4
  - Government balance (percent of GDP): 2013 -2.0; 2014 -2.4; 2015 -2.4
  - Private (percent of GDP): 2013 12.0; 2014 12.5; 2015 12.9
  - Current account balance (percent of GDP): 2013 -1.5; 2014 0.1; 2015 0.3

### Credit-less recovery assessment and investment financing
- Probability of a credit-less recovery estimated at 78 percent given a peak-to-trough expected contraction in output of 13.3 percent.
- Free cash flow and investment:
  - Estimated free cash flow for whole economy that could be invested is close to €2 billion (out of which €1.6 billion from select sectors).
  - Staff’s conservative investment projection for 2014-15 is €1.5-1.6 billion.
  - Staff estimates private fixed investment financed by: free cash flow 50 percent; FDI 30 percent; bank loans 20 percent.
- Sectors likely to lead a credit-less recovery: tourism, industry, communication, agriculture, and professional services (together accounting for 30 percent of GVA), given relatively strong cash flow, low credit dependence, and relatively low NPLs.

### Risks and debt sustainability
- Downside risks highlighted:
  - A change in depositor sentiment amid relaxation of payment restrictions could destabilize the system and exacerbate the recession.
  - Risk of a deflationary spiral with prolonged price declines weighing on private balance sheets.
  - Continued deleveraging, tighter liquidity conditions for companies, and exhaustion of consumer liquidity buffers could prolong recession and slow recovery.
  - Ukraine crisis may lead to capital flight from non-resident depositors of foreign banks in Cyprus.
  - Political risks: diminished support for the program following breakup of governing coalition could raise uncertainty about program implementation and hamper confidence.
  - Upside: continuation of H2 2013 activity trends, prospects for gas exploitation, and reunification could improve long-term growth potential.
- Public debt projections and vulnerabilities:
  - Public debt revised to 112 percent of GDP in 2013; just below 122 percent of GDP in 2014.
  - Baseline: debt expected to peak at around 126 percent of GDP in 2015; decline toward around 105 percent of GDP by 2020.
  - Shock scenarios:
    - More protracted recession → debt gradually rising toward 130 percent of GDP by 2020.
    - Deflation shock in 2014 → higher long-run debt level.
    - Deeper recession + higher banking sector contingent liabilities → could exhaust program buffer and push debt up to about 170 percent of GDP by 2015, falling to around 150 percent of GDP by 2020; likely would require additional financing measures and commitments from European partners.
  - Significant gross needs to finance debt repayments in 2016-2020: about €8 billion.
- External debt and IIP vulnerabilities:
  - Projected gross external debt for 2013 revised down to 340 percent of GDP due to decline in bank liabilities.
  - Long-term external debt projected to fall to 290 percent of GDP by 2020 as external adjustment continues.
  - Cyprus’s net international investment position (IIP) estimated around -100 percent of GDP in 2013; projected to fall to around -80 percent of GDP by 2020.

### Policy discussions and priorities
- Focus areas: further stabilizing the financial sector, continuing prudent fiscal policies, and accelerating structural reforms.
- Financial sector priorities:
  - With recapitalization completed and deposits broadly stable, shift from crisis management to stabilization policies addressing rising NPLs and normalizing payment flows.
- Fiscal policy:
  - Continued prudence and flexibility in implementing the 2014 budget given high macroeconomic uncertainty.
- Structural reforms:
  - Discussions focused on ways to overcome emerging delays and advance the authorities’ ambitious reform agenda.

*Source: IMF staff report text (selected excerpts).*

### 16.      Measureable progress in the implementation of bank and coop restructuring plans is

### _cr1492 - 16.      Measureable progress in the implementation of bank and coop restructuring plans is

### Progress in implementing bank and coop restructuring plans
- Restructuring plan for the coop sector was finalized and submitted to the European Commission, together with the independent valuation of the sector, meeting the end-January structural benchmark.
- Public funds were injected in the coop sector in early March, helping to boost both its capital and liquidity position.
- Consolidation progress:
  - "85 out of 93 coops having been merged into 16 new institutions by end-February."
  - Graphic and Box 2 describe consolidation of 93 coops into 18 (Billions of euros) and list "# of merged coops: Total assets" (source: Central Bank of Cyprus).
- Personnel cost reduction measures implemented:
  - Voluntary retirement scheme.
  - Adoption of a pay-scale equalization policy across the sector.
- Bank of Cyprus (BoC) reported progress in its plan by cutting costs; BoC also reached an agreement to sell its Ukrainian subsidiary (sale not yet closed), which could help further reduce risk assets and increase liquidity.

### Governance and oversight measures (commitments and benchmarks)
- Complete the mergers of CCIs by end-March (existing structural benchmark).
- Fill remaining vacancies on boards and executive management teams.
- Expand role of the monitoring trustee appointed by the European Commission to provide independent and professional oversight over implementation of the restructuring plan.
- Insulate management of legacy Laiki’s 18 percent share in BoC from political interference (end-January structural benchmark).
- Dispose of Laiki’s investments in subsidiaries abroad in an expeditious and orderly manner; authorities committed to find and appoint a specialized firm/institution to perform these tasks by end-April (modified structural benchmark).
- Establish dedicated units to supervise BoC and the coops; these units will assess banks’ performance against restructuring plans and report to the CBC Board on a quarterly basis, with the first report due at end-May (new structural benchmark).
- Reassess BoC’s restructuring plan after the first year of implementation to identify whether changes are warranted.
- For the coop sector, verify in one year’s time consistency of risk management practices across the sector in line with the restructuring plan.

### Cooperative credit sector: recapitalization, consolidation, restructuring (Box 2)
- Market position as of September 2013:
  - Overall market share of 45 percent in domestic deposits and 25 percent in domestic loans.
  - Assets amounted to about 100 percent of GDP.
- Identified causes of sector difficulties: weak governance, poor lending policies, separation of supervision from banks, high credit concentration on collateral-based lending.
- Recapitalization:
  - The CCB was fully recapitalized by the state in early March by injecting €1.5 billion to allow the sector to achieve a capital ratio (CET1) of 9 percent ET1 (on a consolidated basis) through 2017.
  - Recapitalization amount identified on basis of the PIMCO assessment under the adverse scenario, supplemented by the CBC’s own assessment.
- Consolidation:
  - CCB to use recapitalization resources to restore solvency of individual CCIs up to 4 percent CET1.
  - Precondition to receive fresh capital: all 93 CCIs agreed to merge into 18 new institutions based on geographical, scale, and profitability criteria.
  - CCB to participate in appointment of new management and board teams following fit and proper criteria.
- Restructuring actions through 2017:
  - Transform CCB into decision center of the sector (strategy, risk policies, capital budgeting, funding).
  - Centralize loan restructuring and recovery in a special CCB unit; loans below a defined threshold remain within CCIs but follow CCB policies, processes, and quantitative targets.
  - Streamline operations: voluntary redundancy schemes, harmonization of pay scales, reduce number of branches from 349 to 239 through 2015, dispose of noncore commercial service businesses.
  - Gradual deleveraging: Loans net of provisions amount to € 11.5 billion, or about 70 percent of GDP (compared to 94 percent of GDP in 2012), and are expected to decline to 64 percent of GDP by 2016.

### Nonperforming loans (NPLs), arrears management, and operational readiness (paras 17)
- NPL challenge: halt and reverse asset deterioration through effective workouts of troubled loans.
- Actions and commitments:
  - BoC and coops to put in place specialized units and policies to deal with NPLs and early arrears.
  - CBC committed to complete an assessment of operational preparedness to incorporate requirements of the new Code of Conduct and Arrears Management Framework:
    - By end-March for the banks (existing structural benchmark).
    - By end-May for the coops (new structural benchmark).
  - CBC to finalize an assessment of bank and coop arrears management policies, procedures, and practices by end-June; develop recommendations and update Code of Conduct and Arrears Management Framework directives as needed.
  - CBC to enhance reporting requirements on asset quality, early arrears, and operational debt-restructuring indicators; step up onsite and offsite monitoring; expand role of bank auditors to facilitate monitoring of banks’ progress with debt restructuring and expected increase in provisioning levels.

### Legal framework weaknesses and reform commitments (paras 18 and Box 3)
- Identified legal deficiencies:
  - Foreclosure and debt enforcement procedures ineffective; foreclosures reportedly taking up to 20 years in some descriptions; issuance of title deed may take up to ten years.
  - Large backlogs in issuance and transfer of title deeds.
  - Outdated insolvency laws; insolvency practitioners unregulated; secured creditors not included in insolvency procedures.
  - Use of unregistered land sale contracts creates potential conflicts among multiple debtors.
- Authorities committed to develop by end-May a comprehensive reform strategy covering:
  - Foreclosure procedures:
    - Amend legislation by end-June to facilitate foreclosures through private auctions.
    - Prepare a report to assess magnitude of registered but untitled land sales contracts and underlying mortgages and prepare recommendations.
  - Corporate and personal insolvency:
    - Submit to parliament amendments to both corporate and personal insolvency legislation by end-2014 (structural benchmarks).
    - New legislation expected to provide incentives and mechanisms for creditors to reach solutions with viable borrowers within a well-defined framework (including treatment of government claims); staff urged conformity to international best practice and inclusion of SMEs and micro enterprises.
  - Institutions:
    - Clarify the role of the Financial Ombudsman to handle consumer complaints, including compliance with the Code of Conduct, given it is not well suited to play an enhanced role in mediating debt restructuring negotiations.
    - Review rules of civil procedures and other court rules to identify potential inefficiencies and develop recommendations to strengthen debt enforcement, restructuring and insolvency procedures.
- Review plan:
  - Understandings reached on need for a review of the overall reform strategy to be conducted in the second half of 2015 to evaluate effectiveness and assess whether additional actions are needed.

### Private sector debt and NPL statistics (Box 3)
- Private sector debt levels and NPLs as reported:
  - Household bank debt: 134 percent of GDP at end-December 2013.
  - Corporate bank debt: 142 percent of GDP at end-December 2013.
  - NPLs in the domestic banking sector reached 135 percent of GDP (€22 billion), of which:
    - 55 percent of GDP (€9 billion) for households.
    - 80 percent of GDP (€13 billion) for corporates.
  - Construction and real estate sector exposure:
    - Loans concentrated in construction and real estate where NPLs are highest.
  - Loans net of provisions: € 11.5 billion, or about 70 percent of GDP (compared to 94 percent of GDP in 2012); expected to decline to 64 percent of GDP by 2016.
- Legal process timeframes cited:
  - Foreclosures reportedly taking up to 20 years.
  - Issuance of a title deed in Cyprus may take up to ten years.

### Gradual normalization of payment flows and safeguards (para 19)
- Stage 2 milestones completed; authorities relaxed restrictions:
  - Abolished automatic renewal of maturing term deposits.
  - Raised limits on domestic transfers of funds.
- Commitments to further gradual steps in line with milestone-based roadmap while monitoring deposit and liquidity trends to safeguard financial stability:
  - Further raising limits on domestic transfers.
  - Increasing limits on cash withdrawals.
  - Removing restrictions on opening new accounts, with a view to eventual abolition.
- Staff welcomed increase in liquidity buffers in BoC and the coop sector and stressed:
  - Need for prudent but flexible use of liquidity buffers.
  - Ensure flexibility on collateral requirements.
  - Ample provision of liquidity by the Eurosystem.
  - Strengthen monitoring of deposit and liquidity trends, coordination between Ministry of Finance and the Central Bank, and communication to market participants about objectives and achievement of milestones.

### Supervision, regulation, and AML/CTR enhancements (paras 20–21)
- Banking supervision and regulatory enhancements:
  - CBC adopted a new NPL definition and guidelines for asset impairment and provisioning (the latter coming into effect in 2014) in line with best practices.
  - Cyprus positioned to transition to upcoming European regulations entering into effect by end-2014, including strict rules regarding recognition of restructured loans as performing.
  - CBC will assess potential impact of upcoming EU-wide requirements for adoption of Basel III through 2018.
  - Authorities committed to boost supervisory staffing to meet increased needs related to the upcoming SSM and the EU-wide Asset Quality Review.
  - Commit to ensure effective supervisory use of credit register information and to revise the resolution law to enhance the Resolution Authority’s effectiveness and insulate it from political interference.
- AML/CFT and company transparency commitments:
  - CBC allocated additional AML supervisory resources and finalized a risk-based supervisory program for 2014, meeting the end-February structural benchmark; this allows resumption of inspections to ensure banks adequately implement AML/CFT legal framework.
  - Supervision of professions (lawyers, accountants, administrative services providers) being improved; relevant supervisors developing risk-based supervisory tools.
  - Authorities committed to develop an action plan to address recommendations of a third-party assessment of the Registrar of Companies and remedy weaknesses identified by the Global Forum Report related to transparency and exchange of information for tax purposes; plan to include actions to streamline Registrar processes, reduce backlogs, and move toward electronic filing.
  - Emphasis on bolstering transparency in registration of companies by collecting and updating basic information as company registrations have started to pick up.

*Source: _cr1492 - 16.      Measureable progress in the implementation of bank and coop restructuring plans is (IMF).*

### 22.      The 2014 primary deficit target was reduced to reflect the over-performance in 2013

### _cr1492 - 22.      The 2014 primary deficit target was reduced to reflect the over-performance in 2013

### Fiscal targets and adjustments
- Primary deficit target reduced from 3.3 to 2 percent of GDP.
- Reduction accounts for:
  - an estimated 0.7 percent of GDP permanent savings in 2013 (largely from better-than-expected social contributions collections and lower wage bill);
  - an additional 0.6 percent of GDP in expected central bank dividends.
- Given cyclical and one-off factors underlying the tighter targets, the fiscal impulse remains broadly unchanged.
- Staff recommendations and cautions:
  - Maintain flexibility given large macroeconomic uncertainty, contingent liability risks from government guarantees, and uncertain costs of the upcoming welfare reform.
  - Minimize across-the-board discretionary spending cuts; ensure institutions affected by cuts can generate sustainable savings to avoid overruns or arrears.
  - Adjustment of targets does not require additional fiscal measures beyond those in the 2014 budget.
  - Automatic stabilizers would be allowed to operate if 2013 over-performance factors are temporary.

### Short-term debt posture and guarantees
- Authorities committed to preserve the end-2013 level of short-term debt (MEFP ¶14).
- Treasury bills declined by about €240 million (1.4 percent of GDP) relative to the level envisaged at program start.
- Authorities noted opportunity to save on interest costs by reducing short-term debt stock due to comfortable liquidity position and better budget outcomes.
- Staff stressed maintaining liquidity buffer and existing financing sources given downside risks.
- Requested revisions to 2014 ceilings for public debt and government guarantees (MEFP ¶15):
  - Adjust downward the end-March debt target due to 2013 lower debt base.
  - Propose higher end-June target to allow disbursement of an additional €100 million from the EIB for on-lending to SMEs.
  - Adjust downward the end-March guarantee ceiling due to change in EIB disbursements, and increase the 2014 guarantee ceiling by about €200 million to accommodate:
    - new EIB loans to domestic banks to support SMEs (€100 million);
    - additional guarantees for existing EIB loans to the state electricity company and sewerage boards (€100 million total).
- Agreement that limited size of new schemes does not materially alter debt sustainability outlook and would facilitate credit provision given tight liquidity conditions.

### Structural fiscal reforms — social welfare reform (GMI)
- Social welfare reform introducing a Guaranteed Minimum Income (GMI) scheme aims to expand coverage to all vulnerable groups, including working poor and those exhausted unemployment benefits.
- Initial costing estimates under different eligibility and benefits assumptions could amount up to ¾ percent of GDP.
- Next steps discussed:
  - Final design:
    - Authorities working on final eligibility criteria and benefit levels to improve coverage and reduce poverty, and on financing modalities via streamlining overlapping benefits in a budget-neutral manner.
    - Staff called for maintaining prudent cost estimates given macroeconomic uncertainty.
    - Final design expected to be subject to public consultation, followed by government approval at end-March (existing structural benchmark).
  - Roll-out:
    - Implementation target maintained at end-June (existing structural benchmark) but could face IT-related delays or spending overruns due to mid-year start and lump-sum payments.
    - Staff highlighted urgency to protect those outside safety net (an estimated 20,000, including young working poor and unemployed).
    - Staff supported introduction of an IT pilot test before full roll out and suggested identifying reallocations within the 2014 budget to cover potential additional short-run costs.

### Revenue administration reform and short-term revenue measures
- Need to improve efficiency and effectiveness of revenue collections to safeguard fiscal sustainability (MEFP ¶17).
- Short-term measures:
  - Combat tax evasion associated with a large informal economy and under-reporting of personal income (end-December structural benchmark).
  - Finalized detailed annual plan for targeted joint audits; agreed to monitor implementation for audits of large and high-risk taxpayers through new indicative targets (MEFP Table 2).
  - Commit to submit remaining legislative amendments to parliament as a prior action for the review to increase collection enforcement powers and establish self-assessment for all income taxpayers.
  - Monitor monthly indicators (registration, filing and payment, auditing and debt collection) to detect slippages during transition to new integrated revenue administration.
  - Tax arrears estimated to have reached over €1 billion, or 7 percent of GDP at end-2013; authorities committed to prepare a comprehensive report as basis for a detailed tax debt-recovery plan.
- Long-term reform — integrated revenue administration:
  - Government approved reform plan outlining organizational design and implementation timeline for merging Inland Revenue Department (IRD) and VAT Services (VS).
  - By end-April, submit to parliament a new enabling law to transfer powers and operations to the new integrated tax department (new structural benchmark).
  - Appoint new senior management team to oversee transitional structure of the two agencies.
  - Operational integration to be gradual, prioritizing an integrated unit for large taxpayers (end-December structural benchmark).
  - Full implementation envisaged in early 2016.
- Staff stressed continuous consultation with existing management and staff to ensure buy-in and continuity.

### Public financial management and privatization
- FRBSL umbrella law adopted in mid-February as a prior action (MEFP ¶18) to strengthen budgeting, monitoring, fiscal risk management, natural resources management, transparency, and accountability.
- Authorities amended Public Debt Management Law to facilitate monitoring of government guarantees.
- Staff urged careful execution and prioritization, especially in areas with higher fiscal risk such as public investment management.
- Authorities committed to develop a detailed roadmap including remaining secondary legislation/guidelines to fully implement the FRBSL and to enhance monitoring of guarantee risks.
- Privatization law adopted in early March as a prior action (MEFP ¶19):
  - Law defines privatization scope, institutional setup, procedures, requires proceeds to be channeled through the budget, and requires regulation of potential monopolies prior to privatization.
  - Authorities committed to establish a privatization unit by mid-May 2014 to prepare assets for sale once the economy recovers (preparations can take 6-24 months depending on the asset).
  - Privatizations to be case-by-case using various methods, prioritizing maximization of revenues, protection of public interest, adequate regulation, and employment rights considerations.
  - Staff called for prioritizing assets with greatest market value, such as the telecommunications company.

### Program modalities, conditionality, and monitoring
- All quantitative performance criteria (PCs) met, but mixed compliance with structural conditionality required three prior actions to complete the review (MEFP Tables 1-3).
- Prior actions implemented:
  - Adoption of public financial management umbrella law (end-December structural benchmark).
  - Adoption of privatization law (MEFP commitment).
  - Submission to parliament of measures to fight non-compliance and tax evasion (end-December structural benchmark).
- Proposed modifications of four end-March PCs:
  - (i) general government primary balance;
  - (ii) general government primary expenditure;
  - (iii) stock of general government debt;
  - (iv) accumulation of government guarantees.
  - Changes to (i)-(ii) reflect tightening given 2013 over-performance and updated adjustor for budgetary compensation of Laiki pension funds (TMU ¶6 and 8).
  - Change to (iii) reflects downward adjustment due to lower short-term debt level in 2013 and removal of previously incorrectly included debt.
  - Change to (iv) reflects increase due to additional guarantees for expected EIB disbursements to support SMEs, and loans for sewerage boards and the electricity company.
- Quantitative PCs proposed for end-June 2014 (MEFP, Table 1); indicative targets to monitor revenue administration proposed (MEFP, Table 2).
- Structural benchmarks:
  - Two out of five SBs for the third review met on time; two became prior actions; one remaining SB (entrusting independent party with Laiki voting rights) modified to include management of disposal of Laiki’s assets and extended to end-April.
  - Six new benchmarks proposed (MEFP, Table 3):
    - (i) Submission to Parliament of enabling law consolidating two tax authorities into single tax department (end-April 2014).
    - (ii) Submission to CBC Board of first quarterly report on BoC’s/coops’ performance in implementing restructuring plans (end-May 2014).
    - (iii) Completion of assessment of operational capacity of coops’ loan workout units, including early arrears (end-May 2014).
    - (iv) Submission to parliament of personal insolvency legislation (end-December 2014).
    - (v) Submission to parliament of corporate insolvency legislation (end-December 2014).
    - (vi) Establishment of an integrated large taxpayers unit (end-December 2014).

### Risks, mitigating factors, and financing
- Implementation risks and contingent liabilities:
  - Breakup of ruling coalition compromised government’s parliamentary majority, weakening political support for program policies.
  - Resistance to privatization from labor unions and interest groups likely to intensify as assets are prepared for sale and employment rights issues arise.
  - Additional capital needs from the AQR exercise and stress tests cannot be excluded.
  - Litigation risks due to many legal claims associated with resolution of Laiki and BoC could result in additional fiscal costs.
- Mitigating factors:
  - Recent prior actions and earlier difficult decisions suggest authorities retain ability to implement key policies under political strain.
  - Recapitalization under PIMCO’s assumptions ensures institutions can withstand some further asset quality deterioration.
  - Sizeable program buffer could accommodate additional needs, including as a result of the AQR.
  - Government has been successful in rejecting claims in district courts so far.
- Financing assurances:
  - Program expected to be fully financed through the next 12 months.
  - Planned disbursements from the ESM/IMF (about       €2.5 billion), expected additional central bank dividends (€200 million to be distributed by end-April, MEFP ¶20), and government deposits (about €1 billion at end-2013, including not-yet-deposited checks) more than cover projected financing needs in 2014 (€2.6 billion).
  - Prospects for adequate financing for remainder of program include remaining ESM/IMF disbursements, an additional €200 million central bank dividends expected in 2015-16, and steps to prepare public assets for privatization.
  - Authorities identified assets and are carrying out independent appraisals needed to complete swap of about €1 billion of debt held by the CBC for state-owned assets by mid-2014 to lower public debt.

### Capacity to repay and debt dynamics
- Exposure to the Fund peaks in 2016 at 563 percent of quota or 6.1 percent of GDP.
- Debt service to the Fund, measured relative to exports and GDP, is expected to remain manageable.
- External and public debt sustainability and capacity to repay the Fund depend on continued external and fiscal adjustment, economic recovery, and timely implementation of the adjustment program.
- Risks remain, particularly vulnerabilities in the financial sector.

### Staff appraisal — implementation challenges and priorities
- Authorities have shown resolve in implementing the adjustment program; macroeconomic outcomes have exceeded expectations and fiscal targets met with considerable margins.
- Challenges:
  - Economic outlook difficult: output expected to further decline this year and recover only modestly next year.
  - Diminished political support and resistance from vested interests make policy implementation challenging.
- Financial sector priorities:
  - With recapitalization of banks and coops completed, need tangible progress in implementing restructuring plans.
  - Authorities injected public funds into coop sector, improving capital and liquidity; consolidation and cost rationalization advanced.
  - Bank of Cyprus advanced cost cutting.
  - Further steps needed to strengthen banks’ and coops’ governance and enhance supervision, including close monitoring of restructuring plan implementation.
- Non-performing loans:
  - Authorities established code of conduct and general arrears management framework; banks and coops establishing specialized units for troubled loans.
  - Critical to ensure institutions have adequate policies and operational capacity to halt and reverse asset deterioration.
  - Urgent to implement strong legal framework facilitating foreclosures, modernize insolvency regime, and strengthen institutions to promote voluntary debt restructuring and discourage strategic defaults.
- Payment flows and liquidity:
  - Authorities have taken steps to relax payment restrictions per published roadmap; need additional gradual steps with heightened monitoring of deposit and liquidity trends.
  - Enhanced communication to markets and coordination between government and central bank needed to maintain confidence.
  - Adequate liquidity provisioning by the Eurosystem remains key.
- Supervision, regulation, and AML:
  - Need further strengthening in preparation for European single supervisory and resolution mechanisms.
  - Maintain adequate capacity during transition given enhanced domestic supervisory tasks.
  - Authorities are strengthening AML supervision and enhancing company transparency.

*Source: _cr1492 - 22.      The 2014 primary deficit target was reduced to reflect the over-performance in 2013*

### 39.      With 2013 fiscal targets met comfortably, the authorities continue to pursue prudent

### _cr1492 - 39.      With 2013 fiscal targets met comfortably, the authorities continue to pursue prudent

### Fiscal performance and near-term posture
- With 2013 fiscal targets met comfortably, the authorities continue to pursue prudent fiscal policies.
- Careful execution of the budget, together with better-than-expected macroeconomic outcomes, helped to over-achieve 2013 targets.
- The authorities have locked in permanent savings by targeting a lower deficit level this year.
- Achieving their targets will require continuing to implement the budget prudently, given still high macroeconomic uncertainty and contingent risks from government guarantees.
- If the factors that led to the over-performance in 2013 prove to be temporary, automatic stabilizes would be allowed to operate.

### Structural reforms and implementation priorities
- The implementation of structural reforms needs to be accelerated.
- The authorities overcame delays by taking decisive measures to improve budget management, fight tax evasion, and put in place a legal framework for privatization.
- Looking forward, they will need to continue to implement their ambitious reform agenda in a timely manner.
- Priority should be given to the implementation of the welfare reform to protect vulnerable groups during the downturn, and to measures to protect revenues so as to safeguard fiscal targets.
- Efforts need to continue to advance the revenue administration reform, implement the new fiscal responsibility law, and prepare state assets for privatization.

### Risks, challenges, and policy implementation
- Risks remain significant, and full and timely policy implementation is essential to the program’s success.
- Macroeconomic and financial sector risks could jeopardize the recovery and debt sustainability.
- Emerging political risks and resistance from vested interests could complicate policy implementation.
- In this context, the authorities will need to redouble efforts to ensure strong policy implementation, which remains critical to boosting confidence and restoring growth.

*Source: _cr1492 - 39.      With 2013 fiscal targets met comfortably, the authorities continue to pursue prudent*

### 42.      On the basis of progress to date and policy commitments going forward, staff

### On the basis of progress to date and policy commitments going forward, staff supports the completion of the third review and the proposed modifications to performance criteria.

### Staff recommendation
- Staff supports the completion of the third review and the proposed modifications to performance criteria.

### Fiscal and public debt outlook
- Nominal gross public debt (selected historical/projection sequence, in percent): 63.5, 71.1, 85.5, 112.0, 121.5, 125.8, 122.5, 116.1, 111.6, 107.9, 104.5.
- Primary balance (selected series, in percent of GDP): 3.8, -3.6, -3.0, -4.0, -3.2, -1.7, -2.0, -2.1, 1.2, 3.0, 4.0, 4.0, 4.0.
- General government balance (selected series, in percent of GDP): 0.9, -6.1, -5.3, -6.3, -6.4, -4.7, -5.2, -5.2, -2.0, -1.0, -0.2, -0.5, -0.7.
- Projections for 2015-18 assume unspecified additional fiscal measures as agreed under the program; it is assumed that 70 percent of the measures are on the spending side and the rest on the revenue side.

### Gross financing requirements and program financing (May–December 2013 and projections)
- Gross financing requirement including a buffer (May–December 2013): 5,845.3 (Millions of euros).
- Government component (May–December 2013): 3,389.1 (Millions of euros).
  - Fiscal deficit: 816.8 (Millions of euros).
  - Debt maturities: 2,572.3 (Millions of euros).
- Banks recapitalization/support (May–December 2013): 1,500.0 (Millions of euros).
- Market financing planned (May–December 2013): 776.2 (Millions of euros).
- Net financing requirement (2013): 5,069.1 (Millions of euros).
- Official financing sources and buffers (2013): 4,843.4 (Millions of euros).
  - IMF: 258.4 (Millions of euros).
  - ESM: 4,585.0 (Millions of euros).

### Program financing schedule (IMF purchases)
- Availability dates and amounts (Millions of SDR / Percent of Quota) for scheduled reviews/purchases: May 15, 2013 — 74.25 / 46.93%; September 15, 2013 — 74.25 / 46.93%; December 15, 2013 — 74.25 / 46.93%; March 15, 2014 — 74.25 / 46.93%; June 15, 2014 — 74.25 / 46.93%; September 15, 2014 — 74.25 / 46.93%; December 15, 2014 — 74.25 / 46.93%; March 15, 2015 — 74.25 / 46.93%; June 15, 2015 — 74.25 / 46.93%; September 15, 2015 — 74.25 / 46.93%; December 15, 2015 — 74.25 / 46.93%; March 15, 2016 — 74.25 / 46.93%.  
- Total: 891.00 (Millions of SDR) / 563.21 percent of quota.

### External debt and external financing vulnerability
- Baseline external debt trajectory (percent of GDP) and related metrics highlight elevated external financing needs and sensitivity to shocks; gross external financing need (in billions of US dollars) series includes: 52.1, 81.2, 109.4, 85.3, 79.0, 55.0, 44.1, 41.7, 39.7, 39.1, 40.0, 40.0, 39.6 (as presented).
- Definitions and thresholds used in stress tests and heat map:
  - External financing requirement defined as sum of current account deficit, amortization of medium- and long-term total external debt, and short-term total external debt at end of previous period.
  - Benchmarks for stress assessment include gross financing needs benchmark of 20 percent, bond spread thresholds of 400 and 600 basis points, external financing requirement thresholds of 17 and 25 percent of GDP, change in share of short-term debt thresholds of 1 and 1.5 percent, and public debt held by non-residents thresholds of 30 and 45 percent.

### Public Debt Sustainability Analysis (stress tests and scenarios)
- Stress-test scenarios covered: Baseline; Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Macro-Fiscal Shock; Deeper Recession and Contingent Liability Shock; Contingent Liability Shock; Deflation Shock; More Protracted Recession Shock.
- Example scenario assumptions (selected):
  - Baseline real GDP growth (2013–2020): -6.0, -4.8, 0.9, 1.9, 2.3, 2.2, 1.9, 1.8.
  - Combined Deeper Recession and Contingent Liability Shock primary balance (2013–2020): -1.7, -13.5, -12.5, -0.9, 2.0, 4.0, 4.0, 4.0.
  - Effective interest rate paths vary across scenarios and years as presented in the stress-test tables.

### Financial sector actions and conditionality (completed measures and commitments)
- Measures completed (selected):
  - Implemented reform of COLA wage indexation mechanism in public sector by extending freeze to end of program and limiting application to 50 percent of price index thereafter (December 2012).
  - Adopted the 2013 and medium term budget with consolidation measures of about 4.5 percent of GDP (December 2012).
  - Independently assessed banking sector capital needs (February 2013).
  - Adopted a modern bank resolution law (March 2013).
  - Completed resolution of Laiki and disposed of Greek operations (March 2013).
  - Completed BoC recapitalization and exit from resolution (July 2013).
  - Harmonized NPL classification to best practice (September 2013).
  - Established legal framework for a credit register (November 2013).
  - Adopted a law on Fiscal Responsibility and Budget Systems (February 2014).
- MEFP commitments with deadlines (selected):
  - Authorities to complete the mergers of 93 coops into 18 new institutions — End-March 2014.
  - Credit register to be operational — End-September 2014.
  - CBC to request a standalone assessment against the “Basel Core Principles for Effective Banking Supervision” — End-December 2015.
  - Authorities to privatize the telecommunications company (CyTA) and the commercial activity of the ports administration (CPA) — End of program.
  - CBC to conduct a debt-to-asset swap aiming to reduce public debt by approximately €1 billion — End-June 2014.
- Conditionality for the Third Review (selected items and status):
  - Performance criterion: "There will be no measures to intensify restrictions on the making of payments and transfers for current international transactions or to introduce multiple currency practices" — Continuous — Met.
  - Structural benchmark: Adoption of a law on fiscal responsibility and budget systems — End-December 2013 — Completed as a prior action on February 13.
  - Structural benchmark: Adoption of measures to fight tax evasion — End-December 2013 — Prior action for completion of the review.
  - Structural benchmark: Resolution Authority to instruct the Special Administrator to entrust the voting rights of legacy Laiki equity stake in BoC to a well-recognized and independent consulting or auditing firm(s) or international institution(s) — End-January 2014 — Not Met.
  - Structural benchmark: Completion of an independent fair value assessment of the CCB's and CCI’s assets and submission of final restructuring plan of the CCI sector to the European Commission — End-January 2014 — Met.
  - Structural benchmark: Adoption by the CBC of a plan to strengthen the effectiveness and adequacy of resources allocated to the AML/CFT supervisory function — End-February 2014 — Met.

### Social, structural, and administrative reforms (selected)
- Social welfare reform milestones:
  - Authorities to initiate consultation with social partners on elements of social welfare reform — End-March 2014.
  - Council of Ministers to approve final design of reformed social welfare system, including decisions on type, level and eligibility criteria for GMI — End-March 2014.
  - Authorities to implement the social welfare reform — End-June 2014.
- Revenue administration and public financial management:
  - Authorities to prepare a report on tax debt covering IRD and VS tax accounts — End-March 2014.
  - Authorities to submit law consolidating two existing tax agencies into a single Department of Taxation — End-April 2014.
  - Authorities to prepare a roadmap detailing steps to fully implement the FRBSL — End-April 2014.
  - Authorities to adopt secondary legislation and guidelines for public investment management, including for project appraisals — End-June 2014.

*Source: IMF staff estimates.*

### Appendix 1. Cyprus—Letter of Intent

### Appendix 1. Cyprus—Letter of Intent

### Program status and recent performance
- Fiscal performance through end-December continued to exceed expectations; the decline in output was somewhat less than anticipated.
- All performance criteria (PCs) were met.
- The PC on the primary balance of the general government was met with a comfortable margin due to prudent execution of expenditure and revenue over-performance.
- Structural conditionality progress:
  - Independent fair value assessment of the cooperative sector and submission of its restructuring plan to the European Commission (end-January SB) were completed on time; following approval, €1.5 billion in capital was injected into the sector.
  - SB on strengthening the effectiveness and adequacy of resources allocated to AML/CFT was met.
  - Parliamentary adoption of the fiscal responsibility and budget systems law (FRBSL) and of measures to fight tax evasion (end-December SBs) were delayed; FRBSL adopted on February 13 and legislation to fight tax evasion will be submitted as prior actions for the completion of the review.
  - SB on entrusting voting rights of legacy Laiki equity stake in BoC to a well-recognized and independent entity was missed; planned completion by end-April (modified SB).

### Outlook and macroeconomic projections
- 2013 preliminary output decline: 6 percent (less severe than previously expected 7.7 percent).
- Projection for the adjustment year: output falling by 4.8 percent.
- Projection for next year: return to modest growth of about 0.9 percent.
- Medium- to long-run growth projection: gradually improve toward 2 percent.
- Downside risks to the medium-term outlook remain significant.

### Financial sector policies — objectives and instruments
- Objectives:
  - Restore health of financial system.
  - Strengthen sustainability of public finances.
  - Adopt structural reforms to support long-run growth while protecting welfare.
- Key program focus areas:
  - Gradually relax payment restrictions under the roadmap while safeguarding financial stability.
  - Restructuring Bank of Cyprus (BoC) and the cooperative (coop) sector.
  - Revamping debt restructuring framework to facilitate voluntary workout of non-performing loans (NPLs).
  - Strengthening supervision, regulation, and transparency.

### Normalizing financial flows — actions and safeguards
- Roadmap approach: gradual relaxation of restrictions as financial sector milestones are reached, taking into account confidence and stability indicators.
- Completed measures:
  - First stage of relaxations in H2 2013, including facilitating domestic transfers without justifying documents of up to €1 million and allowing opening of new term accounts with cash.
  - On February 21, abolished restrictions related to automatic renewal of maturing fixed-time deposits and increased limits on domestic transfers.
- Near-term actions:
  - By end-March, set up a joint CBC-Ministry of Finance task force to design a well-targeted communication strategy on the roadmap and banking sector strategy implementation.
  - By end-March, establish a high-level committee to inform about market developments and advise on next steps; additional steps to raise limits on cash withdrawals and gradually increase domestic transfer limits will be taken based on this coordination.
- Liquidity safeguards:
  - Central Bank of Cyprus (CBC) stands ready to maintain sufficient liquidity following Eurosystem procedures and rules.
  - Government guarantees up to €2.9 billion for issuance of bank bonds usable as collateral against liquidity stand ready, if necessary.

### Restructuring financial institutions — BoC and coop sector
- Bank of Cyprus (BoC):
  - Recapitalized in July 2013; reduced operational costs by 42 percent.
  - Reached agreement on the sale of Ukrainian operations and prepared/submitted an arrears management plan.
  - Liberalized blocked deposits amounting to €0.9 billion.
  - A supervisory unit at the CBC will monitor BoC; by end-February 2015 a comprehensive technical assessment of BoC’s restructuring plan will be completed.
- Legacy Laiki assets:
  - Resolution Authority instructed Laiki’s Special Administrator to appoint by end-April 2014 (modified structural benchmark) well-recognized and independent consulting or auditing firms or international institutions to manage disposal of Laiki’s assets abroad and be entrusted with voting rights associated with Laiki’s BoC share participation.
  - A revised roadmap for full disposal of assets will be developed by end-April to maximize value for creditors.
- Cooperative sector (coops):
  - Fair value assessment, restructuring plan, and recapitalization completed; capital injected totaling €1.5 billion.
  - Mergers: 85 out of 93 coops merged into 16 new institutions; remaining 8 coops to be merged into 2 institutions; complete mergers by end-March 2014 (structural benchmark).
  - Capital injection to ensure compliance with the 4 percent individual CT1 ratio for all CCIs by end-April.
  - Governance and monitoring:
    - New CEO appointed to lead restructuring.
    - All new board members and key managers of CCIs to be appointed by end-May 2014 after CBC fitness and probity clearance.
    - A monitoring trustee, under the direction of the EC, to assume tasks immediately after approval of recapitalization aid and submit quarterly and ad-hoc reports.
    - CBC and CCB to agree by end-April 2014 on quantitative indicators for monitoring coop restructuring implementation.
    - By end-January 2015, CBC to complete assessment of CCB’s implementation of effective local and risk management programs and consolidated management program at the CCB level.

### Strengthening supervision and regulation
- Enhanced reporting and monitoring:
  - Work plans for supervisory units responsible for BoC and coop sector, including thematic on-site inspections and off-site reviews on loan restructuring, risk management, operations, and governance.
  - Additional resources allocated to supervisory units, including debt restructuring experts.
  - BoC and CCB instructed to submit, starting with end-April, quarterly reports on implementation of key restructuring actions and progress against operational and financial targets.
  - CBC units to assess these reports quarterly; first quarterly report of the units to be submitted to the CBC Board by end-May (structural benchmark).
  - By end-March, CBC will require BoC and coops to publicly disclose an agreed subset of operational and financial indicators on a quarterly basis.
- Regulatory actions and sequencing with EU integration:
  - Issued new regulations on loan origination and asset impairment and provisioning; adopted new law establishing a credit register.
  - Submission of draft legislation to introduce early corrective actions suspended for coordination with upcoming SSM policies.
  - Recruitment of additional qualified staff prioritized.
- Specific upcoming supervisory/regulatory measures:
  - By end-March, amend resolution law to strengthen effectiveness of the resolution authority.
  - By end-April, CBC to instruct banks to submit estimates of potential impact of newly introduced/upcoming EU rules on capital.
  - By end-March, CBC to instruct banks to submit estimates on profitability and coverage ratio to NPLs by end-June.
  - By end-April, CBC to revise governance directive to specify interaction between internal audit units and supervisors.
  - By end-May, with external technical support, CBC to complete assessment of plans to use the credit register for supervisory purposes relative to best practices.

### Restructuring private sector debt — operational and legal framework
- Policy goal: facilitate loan workouts to clean up bank, firm, and individual balance sheets, reduce NPLs and high private sector indebtedness, while avoiding interference in borrower-creditor negotiations.
- Enhancing banks’ operational preparedness:
  - Code of conduct and arrears management framework developed.
  - Bank reporting:
    - Banks submitted strategies and plans for arrears management.
    - By end-March, CBC will instruct banks to submit, starting with end-March data, monthly reports on early arrears (number and amount of past due loans within 1-90 days, type of actions taken, number and amount of cured or uncured loans) and quarterly key performance indicators for debt restructuring.
  - Official monitoring:
    - CBC appointed a reputable international consultancy to assess operational capacity of commercial banks’ loan workout units by end-March (existing structural benchmark) and of the cooperative sector by end-May (structural benchmark).
    - CBC will assess arrears management policies, procedures, and practices, including strategies to manage troubled assets, by end-June.
    - CBC will instruct banks and coops to implement recommendations no later than end-July.
    - By end-July, CBC will update the Code of Conduct and Arrears Framework directives as needed.
  - External independent assessment:
    - By end-June, CBC will introduce requirements for banks and coops to submit agreed-upon procedure reports by external auditors on effectiveness of debt restructuring arrangements for periods ending December 2014, June 2015, December 2015, and June 2016.
- Enhancing legal framework:
  - Reform framework to be approved by the Council of Ministers by end-May covering:
    - Foreclosure procedures:
      - By end-June, amend legislation to allow seizure and sale of loan collateral through private auctions conducted by mortgage creditors, limiting the role of the Land Register in the auction process.
      - By end-September, identify core functions of the Land Register and amend legislation as necessary.
      - By end-March, establish a task force (Ministry of Finance, Central Bank, Law Office of the Republic, Land Register) to prepare a study assessing registered but untitled land sales contracts and underlying mortgages; task force to develop recommendations by end-June.
    - Corporate and personal insolvency:
      - By end-December, submit to Parliament legislation for effective rehabilitation of viable companies and procedures for licensing/regulation of insolvency practitioners (structural benchmark).
      - By end-December, submit to Parliament personal insolvency legislation (structural benchmark).
    - Institutions:
      - By end-March, clarify role of the Financial Ombudsman in handling consumer complaints regarding compliance with the Code of Conduct during restructuring negotiations.
      - By end-December, complete a review of rules of civil procedure and other court rules to identify inefficiencies and develop recommendations.
  - Review of private sector debt restructuring legal framework to be undertaken in the second half of 2015 to assess results and define additional measures as needed.

### Anti–Money Laundering / Countering the Financing of Terrorism (AML/CFT)
- SB on strengthening the effectiveness and adequacy of resources allocated to AML/CFT was met.
- Further details of AML/CFT strengthening are included in the MEFP Attachment.

### Financing and program requests
- Financing measures progress: allocation of central bank profits, a debt-to-asset swap, and privatization to secure additional financing and reduce public debt.
- Requested IMF actions:
  - Completion of the third review under the EFF arrangement and the fourth purchase under this arrangement in the amount of SDR 74.25 million.
  - Modification of end-March 2014 PCs on:
    - the general government primary balance,
    - the general government primary expenditure,
    - the stock of general government debt,
    - the accumulation of general government guarantees (Table 1 referenced).
  - Establishment of new quantitative PCs for end-June 2014 (Table 1 referenced).
  - Establishment of new or modified SBs:
    - Appointment of an independent institution to dispose of Laiki’s assets and manage its voting rights in BoC, by end-April 2014;
    - Submission to the CBC Board of the first quarterly report regarding BoC’s/coops’ performance in the implementation of restructuring plans, by end-May 2014;
    - Submission to Parliament of an enabling law consolidating the two existing tax authorities into a single tax department, by end-April 2014;
    - Completion of the assessment of operational capacity of coops’ loan workout units, including with respect to early arrears, by end-May;
    - Submission to Parliament of personal insolvency legislation, by end-December 2014;
    - Submission to Parliament of corporate insolvency legislation, by end-December 2014;
    - Establishment of an integrated large taxpayers unit, by end-December 2014 (Table 3 referenced).

*Attachment: Cyprus—Memorandum of Economic and Financial Policies (excerpted sections included above).*

### 11.      We remain committed to strengthen the implementation of our AML/CFT framework.

### _cr1492 - 11.      We remain committed to strengthen the implementation of our AML/CFT framework.

### AML/CFT implementation and supervision
- Having amended the AML/CFT legal framework, in line with best practices, progress continues on implementation.
- Strengthened AML/CFT supervisory function for financial institutions by allocating resources for a total of 7 full-time experienced supervisors by end-2014 (end-February structural benchmark).
- Published statistics reflect sustained exchange of financial information with other financial intelligence units.
- Action plan following external audit concentrates on three areas:
  - Resuming onsite AML supervision by CBC:
    - Plan to implement an inspection program in the course of 2014, starting in March and covering 4 banks by end-June, and another 7 banks by end-December.
  - Taking appropriate supervisory measures following up on AML audit findings:
    - CBC has continued to follow up on auditor’s findings regarding possible breaches of compliance with AML requirements by banks.
    - Having identified breaches of varying degrees of severity in the audited banks, by end-March, the CBC will apply appropriate supervisory measures.
  - Enhancing the operations of the Registrar of Companies:
    - A third party assessment has been finalized.
    - To bolster capacity, finalize and have the Council of Ministers adopt an action plan by end-March aiming to ensure adequate, accurate and current basic information on all types of legal persons registered in Cyprus is obtainable by the Registrar and accessible by the public in a timely manner.

### Fiscal policy stance and targets
- Fiscal policy aims to strengthen public finances and place debt on a sustained downward path to facilitate return to international debt markets.
- 2013 performance:
  - Achieved a primary deficit (on a cash basis) of 1.7 percent of GDP for 2013 versus adjusted target of 3.2 percent of GDP for 2013 and an outturn of 3.3 percent of GDP in 2012.
- 2014 target revision:
  - Revising primary deficit target for 2014 to 2 percent of GDP.
  - Revision reflects permanent improvements in the wage bill and social contributions (0.7 percent of GDP) and additional expected central bank dividends (0.6 percent of GDP).
  - Committed to long-run primary surplus target of 4 percent of GDP by 2018, which requires additional measures in the outer years.
- Short-term debt:
  - Reduced stock of short-term debt at end-December 2013 by about 1.4 percent of GDP relative to a year ago.
  - Committed to preserve current level of short-term debt going forward; will revise debt targets for 2014 accordingly.
- SME support via government guarantees and EIB lending:
  - Secured about €600 million in EIB loans to be on-lent or provide trade credits to SMEs in 2014-2016.
  - Expect €100 million to be disbursed as a direct loan to the government in the second quarter of 2014.
  - Plan to provide guarantees of about €150 million in 2014, given expected schedule of disbursements.
  - Plan additional guarantees amounting to €75 million and €87 million respectively for loan disbursements for ongoing EIB-financed sewerage board projects and for loans to the electricity company EAC.
  - Will modify debt and guarantee targets accordingly.

### Structural fiscal reforms and social protection
- Objectives: (i) improving protection of vulnerable groups, (ii) strengthening public resource administration through effective public financial management and more efficient tax administration, (iii) privatizing state-owned enterprises to enhance efficiency and support public debt reduction.
- Social welfare reform (Guaranteed Minimum Income, GMI):
  - Reform centered on a new GMI, complemented by other targeted benefits such as child or education benefits.
  - In March, initiate consultation with social partners on elements of the reform, already developed and costed.
  - By end-March 2014, Council of Ministers will approve final design of the new system, including decisions on type, level, and eligibility criteria of the GMI, and on level and scope to streamline other benefits (existing structural benchmark).
  - Committed to implement reform by end-June 2014 (existing structural benchmark), provided IT pilot testing phase is completed successfully by end-May.
- Revenue administration improvements:
  - Integrating VAT and Inland Revenue services:
    - Council of Ministers approved plan to create a new function-based tax administration integrating Inland Revenue Department (IRD) and VAT Services (VS).
    - By end-April, submit to parliament the enabling law consolidating IRD and VS into a single Department of Taxation (structural benchmark).
    - By end-December 2014, establish an integrated unit for large taxpayers in the new department (structural benchmark).
  - Short-term measures to boost tax collections:
    - Monitoring: closely monitor monthly performance indicators (registration, filing and payment, auditing and debt collection) to detect slippages.
    - Auditing: developed work program for targeted joint audits for large taxpayers and high-risk sectors during 2014; plan to finalize two pilot comprehensive field tax audits by end-June.
    - Tax debt recovery: by end-March 2014, prepare a report on tax debt covering IRD and VS tax accounts; by end-June prepare a plan specifying modalities to recover debt including installment schemes, set-offs, and other options.
    - Enforcement powers: as a prior action for conclusion of the third review, submit to Parliament legislation to harmonize and increase collection enforcement powers, including authority to garnish assets, or prohibit the alienation or use of assets, including property and bank accounts.
- Public financial management improvements:
  - Fiscal Responsibility and Budget Systems Law adopted as a prior action to strengthen budget formulation and execution, public investment management, and management of fiscal risks.
  - Amended Public Debt Management Law to facilitate monitoring of government guarantees.
  - Supplemented 2014 budget with an SOE annex to improve monitoring of fiscal risks from SOEs and semi-government entities.
  - Introduced pre-invoicing controls subjecting government orders to pre-commitment validation.
  - By end-April, prepare a roadmap detailing steps required to fully implement the FRBSL, including additional legislation and guidelines and prioritization.
  - By end-June, adopt secondary legislation and/or guidelines for public investment management, including project appraisals.
- Privatization objectives and timetable:
  - Adopted a privatization law as a prior action; establishes a unit to manage privatizations to become fully operational by mid-May.
  - Will initiate preparations for privatization of state-owned enterprises with highest commercial value, starting with CyTA (telecommunications company) and commercial activities of the ports administration (CPA), aimed to privatize before end of program.
  - Privatization of electricity company (EAC) requires substantial preparations including unbundling; expected to be finalized by mid-2018.
  - Appoint financial advisors for these three transactions by end-September.

### Program financing, asset valuation, and monitoring
- CBC profits and transfers:
  - CBC will allocate central bank profits to the government expected to result in the transfer of €0.2 billion to the budget by end-April after finalization of CBC’s financial accounts, and an additional €0.2 billion during the program period.
- Asset valuation and debt-to-asset swap:
  - Conducting an independent valuation of state assets to be finalized by end-March, followed by a second valuation on behalf of the CBC to be completed by end-May.
  - Aim to conduct a debt-to-asset swap to be decided by the CBC in accordance with its rules and the Treaties, aiming to reduce public debt by approximately €1 billion by end-June.
- Program monitoring:
  - Implementation monitored through quarterly PCs and reviews.
  - Program includes continuous performance criteria, indicative targets, and structural benchmarks defined in the Technical Memorandum of Understanding (TMU).
  - Continuous performance criterion on non-accumulation of external payment arrears and non-intensification of restrictions of payments and transfers for current international transactions or introduction of multiple practices.
- Authorization:
  - Government authorizes the IMF to publish the Letter of Intent and its attachments, and the related staff report.

### Quantitative conditionality and selected targets (as presented)
- Indicative targets (Table 1 excerpt, Millions of euros; as shown):
  - Floor on the general government primary balance: Dec-13 Target -435; Mar-14 Adjusted target -518 4/; Jun-14 Target -272; Sep-14 Target -22; Dec-14 Target -657 2/; Actual -307
  - Ceiling on the general government primary expenditure: Dec-13 Target 7,205; Mar-14 Adjusted target 7,288 4/; Jun-14 Target 7,121 1,504; Sep-14 Target 3,143; Dec-14 Target 4,734 6835
  - Ceiling on the stock of general government debt: Dec-13 Target 18,668; Mar-14 Adjusted target 18,620 5/; Jun-14 Target 18,407; Sep-14 Target 18,399; Dec-14 Target 18,183 18,233 19129
  - Ceiling on the accumulation of new general government guarantees: Dec-13 Target 25; Mar-14 Adjusted target 1296 5/; Jun-14 Target 510; Sep-14 Target 127; Dec-14 Target 207 312
  - Ceiling on the accumulation of external arrears: 2/ 3/ 0 0 0 0 0
  - Ceiling on the accumulation of domestic arrears: 2/ 0 -0.300 00 0
  - Ceiling on the accumulation of tax refund arrears by the general government: 2/ 10 -3110 10 10 10
- Revenue administration indicative targets (Table 2, cumulative number of audits since January 2014):
  - Number of comprehensive field audits of large taxpayers: Mar-14 0; Jun-14 2; Sep-14 4; Dec-14 6
  - Number of comprehensive field audits of high risk taxpayers: Mar-14 2; Jun-14 8; Sep-14 16; Dec-14 24

*Source: Letter of Intent and Technical Memorandum of Understanding contained in _cr1492 (IMF).*

### 5.      The performance criteria are set on the general government cash primary balance (GGPCB),

### _cr1492 - 5.      The performance criteria are set on the general government cash primary balance (GGPCB),

### Definition and measurement of the GGPCB (performance criterion)
- GGPCB is defined as the general government cash balance (GGCB) minus general government interest receipts plus general government interest payments.
- GGCB is defined as total revenue (tax revenue, social security contributions, grants and other revenue) minus total expenditure.
- Payment of called guarantees will be recorded as cash expenditures.
- Privatization receipts and proceeds from the sale of land and buildings will be excluded from revenue (privatization receipts are defined as receipts associated with the disposal to private owners by a government unit of the controlling equity of a public corporation or quasi-corporation).
- The floor on the GGPCB in each year will be measured cumulatively from the start of that calendar year.
- The floor on the GGPCB will be adjusted downwards by payments related to bank support, when carried out under the program’s banking sector support and restructuring strategy. Transactions that may be excluded from the balance include:
  - loans to financial institutions and investments in equity of financial institutions (requited recapitalization);
  - unrequited recapitalization;
  - purchases of troubled assets.
- Any financial operation by central government to support banks, including the issuance of guarantees or provision of liquidity, will be immediately reported to IMF, European Commission and ECB staff.

### Specific GGPCB adjustments for 2014
- Adjusted downwards by payments to compensate pension funds for the losses related to the resolution of Laiki Bank up to €78 million.
- Adjusted upwards by dividends received from the CBC in excess of €180 million and in excess of €40 million from the semi-government organizations.
- Adjusted downwards by dividends received from the CBC below €180 million and below €40 million from the semi-government organizations.

### Ceiling on General Government Primary Expenditure (GGPE)
- GGPE includes compensation of employees, goods and services, subsidies, social benefits, other recurrent expenditure, and capital expenditure.
- The ceiling on the GGPE will be adjusted upwards by the payments related to bank support, when carried out under the program’s banking sector support and restructuring strategy (same transaction exclusions as for GGPCB).
- The 2014 ceilings on the GGPE will be adjusted upwards by payments to compensate pension funds for the losses related to the resolution of Laiki bank up to €78 million.

### Ceiling on the stock of General Government Debt
- General government debt constitutes total outstanding gross liabilities as defined by ESA95 (includes debt of all institutions included in the general government and other ESA 95 adjustments). Debt will be measured at nominal value.
- The program exchange rate will apply to all non-euro denominated debt.
- The ceiling on general government debt will be adjusted:
  - Upwards (downward) by the amount of any upward (downward) revision to the stock of end-March 2013 general government debt.
  - Upwards (downwards) by the amount of any increase (decrease) to the disbursement of the Cyprus Entrepreneurship fund EIB loan, currently projected at €100 million.
  - Upwards by debt arising from payments for bank restructuring carried out under the program’s banking sector support and restructuring strategy (including loans to financial institutions and investments in equity of financial institutions (requited recapitalization); unrequited recapitalization; purchases of troubled assets). Any such financial operation will be immediately reported to IMF, European Commission and ECB staff.
  - Upwards by the amounts disbursed under the EIB loan to finance projects authorized in the 2014 budget under the National Strategic Reference Framework.

### Ceiling on the Accumulation of new General Government Guarantees
- The ceiling includes domestic and external guarantees granted during the test period, and guarantees for which maturity is extended beyond initial contractual provisions.
- Excludes guarantees granted under a risk sharing instrument of the EU structural funds (COM (2011) 655 final) that do not create contingent liabilities for the Cypriot State.
- Government entities outside of general government but within the non financial public sector are not permitted to grant guarantees.
- Stock of guarantees at end March 2013 was €3.1 billion. For reporting, stock within the year will be derived on the basis of material fluctuations.
- Adjustments to the ceiling:
  - Upwards for issuance of government guaranteed bonds to be used in monetary policy operations to boost BoC’s liquidity up to €2.9 billion.
  - Upwards (downwards) by any increase (decrease) of disbursement of EIB and/or Council of Europe Development Fund loans to be guaranteed by the government in 2014 relative to amounts presented in Table 1 of the MEFP. The annual provision of guarantees cannot exceed €312 million.

### Ceilings on accumulation of arrears
- External payment arrears: payments on debt to non-residents contracted or guaranteed by general government not made within seven days after falling due. Stock of external payment arrears as of end-March 2013 was €0.
- Domestic expenditure arrears: unpaid invoices past due date by 90 days (or 90 days after initiation of the invoice if no due date). Stock of domestic expenditure arrears as of end March 2013 was €0 million.
- VAT refund arrears: unpaid VAT refunds past the due date in tax legislation/regulations. Stock of VAT refund arrears as of end March 2013 was €140 million.

### Prior actions and structural benchmarks (monitoring)
- Adopt a law on fiscal responsibility and budget systems (prior action). The legal framework will:
  - provide comprehensive coverage of the general government sector and government’s financial relationships with state enterprises and public entities outside the general government boundary;
  - incorporate provisions on fiscal transparency and accountability (comprehensive, legally based and independently monitored fiscal strategy consistent with EU requirements) and develop a disciplined, policy-oriented approach to budget decision-making (reduce number of appropriations; adopt top-down budget preparation linked to fiscal policy-making; provide more flexibility to ministries and semi-governmental organizations).
- Submit to parliament measures to fight tax evasion (prior action). Measures include:
  - Amend legislation to establish self-assessment for all income taxpayers;
  - Legislate to harmonize and increase collection enforcement powers of revenue administration, including authority to garnish assets, or prohibit alienation or use of assets, including property and bank accounts.
- Adopt a privatization law (prior action) specifying scope of privatization program, institutional set-up, procedures/modalities, that proceeds will be channeled through the budget, and requirement to regulate potential monopolies prior to privatization.
- CBC to adopt a plan to strengthen AML/CFT supervisory effectiveness and adequacy of resources for financial institutions (end-February 2014). Specifications include:
  - Develop, in consultation with Fund staff, a supervisory program for 2014 including full AML/CFT inspections and thematic reviews (risks from third party introducers, Politically-Exposed-Persons, laundering of proceeds of tax evasion).
  - Allocate adequate resources and staffing: complement existing two full-time AML dedicated staff with a minimum of five additional experienced supervisors over the course of 2014.
  - By end-February, submit tenders to complement resources with external auditors with recognized supervisory experience, including for AML/CFT.
- AML supervision implementation:
  - Quarterly, supervisory competent authorities will, on a confidential and anonymized basis, grant Fund staff access to supervisory assessments and information about enforcement actions for non-compliance/violations.
  - CBC onsite supervision missions will start in the first quarter and step-up during the year per the 2014 annual inspection program; number and quarterly profile of inspections and staffing objectives will be periodically reviewed by CBC and the Fund.
- Financial Intelligence Unit (FIU) will communicate to Fund staff, on a quarterly basis, detailed statistics on financial information exchanged with other FIUs, with a breakdown by country.

### Reporting requirements (data sources, frequency, and maximum time lags)
- Performance monitored using data from the Ministry of Finance (MOF), Cystat, and the Central Bank of Cyprus; authorities will transmit data revisions in a timely manner.
- Key reporting items and maximum time lags:
  - Detailed execution of revenues, expenditure and financing in EDP format: Monthly, MOF Budget Department/Cystat Government Financial Statistics, 27 days after the end of the month (end-December data 30 days).
  - Debt issuance, amortization, interest details, and financial balance sheet transactions: Monthly, MOF Public Debt Management Unit, 27 days after the end of the month.
  - Central Government Debt stock by instrument, maturity, currency, holder; interest bill monthly for current year and next year, annual thereafter until 2020: Monthly, MOF Public Debt Management Unit, 27 days after the end of the month.
  - Budgetary Central Government deposits in Consolidated Fund and Banking System: Monthly, MOF Public Debt Management Unit, 5 days after the end of the month.
  - Stock of expenditure and VAT refund arrears and monthly flows by type: Monthly, MOF Customs & Excise Department, VAT Service, 15 days after the end of the month.
  - Stock of government guarantees and monthly flows by institution: Quarterly, MOF Treasury Department, 27 days after the end of the month.
  - Stock of external arrears: Monthly, MOF Treasury Department, 15 days after the end of the month.
  - Assets and liabilities of the central bank: Monthly, Central Bank of Cyprus, 30 days after the end of the month.
  - Assets and liabilities of domestic operations of banking system—aggregate monetary balance sheet by institutional category: Monthly, Central Bank of Cyprus, 30 days after the end of the month.
  - Assets and liabilities of banking system (consolidated, including foreign operations): Quarterly, Central Bank of Cyprus, 45 days after the end of the reporting period.
  - Individual operational balance sheet of domestic operations of the largest banks and coops with detailed deposit, funding, loan information: Monthly, Central Bank of Cyprus, 30 days after the end of the month.
  - Details for the largest banks and coops on liquid assets, liquidity position, other assets and liabilities: Daily, Central Bank of Cyprus, Next working day.
  - Deposits by institution, currency, residency and end-of-day liquidity buffers: Daily, Central Bank of Cyprus, Next working day.
  - Financial soundness indicators—core set, deposits, NPLs, capital adequacy ratios: Quarterly, Central Bank of Cyprus, 60 days after the end of the month.
- Note: Reporting requirements for cooperative banks will be revisited after the CBC becomes their supervisor.

### Program objectives (from Memorandum of Understanding on Specific Economic Policy Conditionality)
- Restore soundness of the Cypriot banking sector and rebuild depositor and market confidence by restructuring and downsizing financial institutions and strengthening supervision.
- Continue fiscal consolidation to correct the excessive general government deficit by 2016, reducing current primary expenditure, increasing efficiency of public spending within a medium-term budgetary framework, enhancing revenue collection, and improving public sector functioning.
- Implement structural reforms to support competitiveness and sustainable balanced growth, including reforming the wage indexation system and removing obstacles to functioning of services markets.

*Source: _cr1492 - 5.      The performance criteria are set on the general government cash primary balance (GGPCB),*

### 1. Financial sector reform

### 1. Financial sector reform

### Key Objectives
- Implement the restructuring plans of Bank of Cyprus (BoC) and the coop sector.
- Continue strengthening supervision and regulation.
- Reform the debt restructuring framework to facilitate voluntary workout of non-performing loans.
- Gradually lift capital restrictions in line with the published roadmap while safeguarding financial stability.

### Progress since November
- BoC and the Cooperative Central Bank submitted restructuring plans with capital and funding plans to the CBC.
- New Board of the Cooperative Central Bank issued a three-month roadmap and appointed a new General Manager in December 2013.
- Central Bank of Cyprus adopted the loan origination directive on 4 December.
- Implementation of regulatory and supervisory reforms as envisaged in the MoU progressed; supplementary information on the new Code of Conduct for dealing with troubled borrowers published in November.
- Effectiveness and governance of the Resolution Authority reviewed.
- Series of non-performing loans according to the new definition published by the Central Bank of Cyprus.
- Monitoring of banks' management of arrears progressed, including key performance indicators; CBC enhanced operational capacity to follow BoC restructuring plan implementation.
- Macro-financial stability showed signs of improvement; deposit base stabilised and banks' liquidity buffers strengthened.
- Parliamentary Committee approved issuance of guarantees of up to EUR 2.9 billion on 27 January 2014 as contingency collateral.

### A. Regulation and supervision

- Maintaining liquidity in the banking sector
  - Authorities commit to continue implementing the roadmap for gradual relaxation of restrictive measures published on 8 August 2013; milestones consider investor confidence and financial stability indicators including liquidity.
  - A joint CBC-Ministry of Finance task force to be set up by end-February to design a communication strategy on the roadmap and implementation progress.
  - CBC, in consultation with the ECB, to closely monitor liquidity; CBC to take appropriate measures in line with Eurosystem rules.
  - Approval from the House of Representatives obtained for issuance of additional government guarantees of up to EUR 2.9 billion on 27 January 2014 as contingency collateral, in line with State aid rules.
  - BoC and Cooperative Central Bank submitted first capital and funding plans in November 2013 and January 2014, respectively; CBC will receive updated plans quarterly and transmit them to the ECB, the EC, the ESM and the IMF.
  - Funding and capital plans should reflect anticipated deleveraging, gradual easing of restrictive measures, and reduction of borrowing from the central bank while avoiding asset fire sales and a credit crunch; reporting template and macroeconomic scenario provided by the CBC in coordination with the ECB.

- Regulation and supervision of banks and cooperative credit institutions
  - Central credit register legal framework established in December 2013; central credit register to be operational by end-September. By end-May, with external technical support, CBC to complete assessment of supervisory use relative to best practices.
  - New loan origination directive adopted in October 2013.
  - New provisioning and disclosure directive to be finalised by end-February and effective for publication of the 2013 financial statement concerning disclosure requirements. CBC will require banks to submit by end-March an action plan for full implementation starting from 2014 annual accounts.
  - CBC instructed banks to submit by end-April estimates of potential impact of upcoming EU rules on capital and by end-June profitability and coverage ratio.
  - Banks with restructuring plans required to submit, starting from April 2014 (reference date end-December 2013), quarterly reports on restructuring plan implementation containing key performance indicators; CBC supervisory units will assess quarterly. First assessment to be submitted to the CBC Board by end-May.
  - CBC work plan for 2014 includes thematic on-site inspections and off-site reviews on loan restructuring, risk management, operations, and governance for supervisory units responsible for BoC and the coop sector; CBC to provide resources to contract technical support.
  - CBC to clarify allocation of tasks and responsibilities in governance structure to carry out supervisory tasks in line with SSM requirements.
  - CBC to integrate stress-testing into regular off-site supervision, considering CRD IV and CRR and SSM timelines.
  - Operational integration of cooperative credit institutions supervision into CBC to be completed by end-March 2014 per September 2013 action plan, including recruitment of experienced staff and application of CBC supervisory model.
  - Governance directive to be revised by end-April to specify interaction between banks’ internal audit units and supervisors.
  - Accounts of cooperative credit institutions subject to independent annual audit; CBC has right to overturn auditor selection. Consolidated accounts of cooperative credit institutions to be published beginning from 2013 annual accounts.
  - CBC to accelerate recruitment and allocate additional qualified resources to carry out functions in full independence as stipulated by the Treaties.
  - Authorities, in consultation with EC, ECB and IMF and informing the ESM, to review effectiveness of the Resolution Authority, including composition and governance, with legislative and operational changes by end-March.

- Monitoring of corporate and household indebtedness
  - Authorities to step up monitoring of corporate and household indebtedness and prepare quarterly reports including distribution of assets and liabilities across households and assessment of debt-servicing capacity and refinancing activities; surveys to be used until credit register fully operational.
  - Annual Financial Stability Report at year-end will include extended analysis on indebtedness; first report exceptionally by end-April. Quarterly monitoring reports to continue with enhanced scope and content.
  - Framework for targeted private-sector-debt restructuring to be established to facilitate new lending and diminish credit constraints; explore ways to improve SME funding constraints.
    - By end-March 2014 CBC, with external technical support, to complete assessment of operational capacity of banks’ loan workout units, including early arrears; for coops deadline will be end-May after merger completion.
    - Banks required to report quarterly on restructuring progress and NPL management (reference date end-March, submitted by end-May) using specific performance indicators and targets approved by CBC in consultation with EC, ECB and IMF and informing ESM.
    - Banks to report monthly on early arrears (e.g., number and amount of past due loans within 1-90 days, actions taken, number and amount of cured or uncured loans).
    - CBC, with external expert assistance, to review banks’ arrears management policies and practices against international best practices; review completed by end-June and to inform policy recommendations. Revisions of Arrears Management Directive and Code of Conduct to be introduced by end-July as needed.
    - By end-June CBC will introduce requirements for banks and coops to submit agreed-upon procedure reports prepared by external auditors on effectiveness of debt restructuring arrangements and strategies for periods ending December 2014, June 2015, December 2015, and June 2016.
    - Role of the Financial Ombudsman regarding hearing complaints on compliance with the arrears management process to be clarified by end-March.
    - Authorities commit not to introduce new administrative measures that would interfere with bank lending rates; in particular, no ceilings on bank lending rates will be introduced.

- Increasing financial transparency (AML/CFT and beneficial ownership)
  - Based on MONEYVAL April 2013 audit and an independent auditor, authorities progressed on AML framework and committed to implementation under agreed AML Action Plan.
    - Strengthen preventive measures of obliged entities on customer due diligence, use of introduced business and reporting of suspicious transactions (Action Plan – sections 1, 2 and 3).
    - Ensure transparency and timely access to beneficial ownership information of trusts (Action Plan – section 4); establishment of trust registers with supervisory authorities noted (Action Plan – section 4.3.1).
    - Supervisory competent authorities reviewing off-site and on-site procedures and implementing risk-based AML supervision for financial and non-financial institutions (Action Plan – sections 5 and 6); CBC to build on follow-up work from April 2013 audit.
    - On a quarterly basis starting Q4-2013, supervisory competent authorities will, confidentially, share anonymised information with programme partners on supervisory assessments and enforcement actions.
  - Legal framework revised so adequate, accurate and timely beneficial ownership information of Cypriot legal persons and arrangements can be provided to foreign counterparts for money laundering and tax matters.
  - Reform of Department of Registrar of Companies foreseen in section 3.10 to ensure adequate basic information on legal persons is obtainable and publicly accessible in a timely manner.
  - Cypriot FIU to provide programme partners quarterly breakdown of requests made/received and spontaneous disseminations within 14 days of quarter end, starting with Q4 2013; publish this information annually on FIU website.

### B. Recapitalisation and restructuring of financial institutions

- Restoring adequate capital buffers
  - CBC increased minimum Core Tier 1 capital ratio from 8 percent to 9 percent in December 2013.
  - CBC assessing impact of Common Equity Tier 1 definition in CRDIV and CRR; based on assessment CBC will define, by end-March and in consultation with EC, ECB, IMF and informing ESM, minimum capital requirements taking into account balance sheet assessment and EU-wide stress test.
  - Revision will not lead to any distribution of capital by banks found in the PIMCO exercise to face a capital shortfall.

- Management of legacy Laiki
  - Resolution Authority to instruct Special Administrator to appoint by end-March a well-recognised and independent consulting or auditing firm(s) or international institution(s) to manage disposal process and be entrusted with voting rights associated with Laiki’s share participation in BoC.
  - Revised roadmap for full disposal of assets to be developed by end-April in consultation with EC, ECB and IMF and informing ESM to maximize value for creditors.

- Restructuring of Bank of Cyprus
  - By end-February CBC agreed with BoC on quarterly operational and financial indicators to be communicated to the public on restructuring progress.
  - CBC to complete by end-February 2015 a comprehensive technical assessment of BoC’s restructuring plan to identify areas needing further strengthening.

- Restructuring and recapitalisation of Hellenic Bank
  - After successful recapitalisation with privately raised funds, CBC required Hellenic Bank to submit by end-March a business plan covering up to end-2015.

- Restructuring and recapitalisation of cooperative credit institutions
  - CBC assessed capital needs indicating total capital shortfall of EUR 1.5 billion; funds deposited in a securities account with CBC to boost confidence and ensure no depositor contribution required.
  - After fair value assessment and EC approval of restructuring plan, EUR 1.5 billion of state funds to be injected in the Cooperative Central Bank in exchange for common shares.
  - Restructuring plan for cooperative sector submitted to EC in January 2014; public support terms and remuneration to comply with EU state aid rules with due consideration for financial stability.
  - Cooperative credit institutions receiving capital injections will be subject to specific management rules and restructuring process monitored by an external monitoring trustee immediately after EC approval; trustee to submit quarterly and ad-hoc reports and work under EC direction.
  - Trustee responsibilities include overseeing restructuring implementation, verifying governance, use of commercial-basis criteria in key decisions, and assessing loan arrears strategies; trustee to have access to Board minutes and be observer at executive and critical committees.
  - Individual cooperative credit institutions to be merged into a maximum of 18 entities by end-March (per July 2013 strategy) to achieve viability, efficiency and profitability; unviable institutions required to merge with viable ones.
  - Following merger completion and final governance establishment, CBC to review affiliation directive by end-July.
  - Upon completion of legal mergers, Cooperative Central Bank will inject sufficient capital to take a 99 percent stake and ensure compliance with the 4 percent individual core tier 1 ratio; these operations to be finalised by end-April and accelerate appointment of Boards and governance implementation.
  - At consolidated level, sector subject to general minimum core tier 1 capital requirement of 9 percent or the new minimum to be determined per paragraph 1.17.
  - New legal framework established for State stake management in cooperative sector to ensure CCB adopts sound policies without undue political interference; compliance with relationship framework reviewed quarterly by monitoring trustee who will report breaches to EC and authorities will inform ECB, ESM, and IMF of conclusions.
  - Cooperative Central Bank to leverage external expertise for arrears management and corporate restructuring policies; executive and senior management recruitment for CCB and CCIs to be completed by end-May with selection criteria established by CCB and consulted with Ministry of Finance, EC, ECB and IMF informing ESM.
  - CBC and CCB, in consultation with Ministry of Finance management unit, to agree by end-April on quantitative indicators for monitoring coops’ restructuring; main indicators and conclusions to be released as part of quarterly public reporting.
  - By end-January 2015 CBC to complete assessment of CCB’s implementation of effective local and risk management programs for CCIs including consolidated management program at CCB level.

### C. Legal framework for private debt restructuring

- Removal of hurdles to collateral recovery
  - All unnecessary legal, administrative or other hurdles constraining seizure and sale of loan collateral to be removed so assets pledged as collateral can be recovered within a maximum time-span of 1.5 years from initiation of proceedings; primary residences may be extended to 2.5 years.
  - Authorities commit not to introduce further impediments to seizure of pledged collateral.
  - Task Force (CBC, Ministry of Finance, Law Office of the Republic and Land Register) to be established by end-March to prepare a study on registered but untitled land sales contracts and underlying mortgages and develop recommendations by end-June.

- Insolvency and foreclosure framework reforms
  - Authorities, in consultation with EC and IMF and informing ECB and ESM, to prepare comprehensive reform framework to be endorsed by Council of Ministers by end-May establishing appropriate corporate and personal insolvency procedures; legislation to be prepared and submitted to the House of Representatives by December 2014.
  - Legal framework relating to foreclosures and forced sales of mortgaged property to be amended, in consultation with EC and IMF and informing ECB and ESM, and adopted by end-June to allow private auctions by mortgage creditors while limiting role of Land Register in auction process.
  - Authorities to initiate review by end-June and by end-December formulate recommendations on the Civil Procedure Code and Court Rules to ensure smooth functioning of revised foreclosure and insolvency frameworks.
  - Private sector debt restructuring legal framework to be reviewed in second half of 2015 to assess results and define additional measures as needed.

*Source: _cr1492 - 1. Financial sector reform*

### 2. Fiscal policy

### 2. Fiscal policy

### Key objectives
- Continue fiscal consolidation to achieve a 3 percent of GDP primary surplus in 2017, 4 percent of GDP in 2018 and maintain at least such a level thereafter.
- Achieve the annual budgetary targets set out in this Memorandum of Understanding (MoU) through high-quality permanent measures, and additional measures in the outer years, in particular to reduce the growth in expenditure on the public sector wage bill, social benefits and discretionary spending, while minimising the impact of consolidation on vulnerable groups.
- Fully implement the fiscal consolidation measures for 2014, listed in Annex 1.
- Correct the excessive general government deficit by 2016.
- Maintain fiscal consolidation over the medium term, converging towards Cyprus' medium-term budgetary objective of a balanced budget in structural terms by containing expenditure growth, improving the structure of taxation and undertaking fiscal-structural measures, including implementation of a Medium-Term Budgetary Framework designed in accordance with EU specifications.
- Commit to full implementation of fiscal measures adopted for 2012-2014 and to regularly monitor the budgetary effect of measures; any deviation will be evaluated in quarterly programme reviews.
- In the event of underperformance of revenues or higher social spending needs, be ready to take additional measures, including reducing discretionary spending.
- Over the programme period, cash revenues above programme projections, including any windfall gains, will be saved or used to reduce debt; permanent over-performance may reduce the need for additional measures in outer years.
- Refrain from measures (e.g., tax amnesties) that could adversely impact tax compliance and foster tax fraud and evasion during the programme period.
- Ensure EU Structural and Investment Funds are targeted to areas delivering the most important economic and social impact; national funds to cover national contributions will be kept available for 2007-2013 and 2014-2020 programming periods, while taking into account available EIB funding.
- Provide information required by programme partners under Regulation 472/2013 and consult ex-ante with the European Commission, the ECB and the IMF on adoption of policies not included in the MoU but that could materially impact programme objectives.
- In line with State aid rules, not implement State aid measures towards Cyprus Airways until EC approval of a restructuring plan.

### Fiscal policy in 2014
- Based on programme macroeconomic and fiscal projection and reflecting the 2014 Budget, achieve a deficit of the general government primary balance of EUR 277 million (1.8 percent of GDP) in 2014, respecting the EDP recommendation of a headline deficit of no more than 8.4 percent in 2014.
- Fully implement permanent measures included in the 2014 Budget, amounting to at least EUR 270 million in 2014 (Annex 1).
- Note: The ESA95 budgetary targets are not comparable to, but remain consistent with the respective cash-based budgetary target set in the context of the economic adjustment programme.

### Fiscal policy in 2015-16
- Achieve a deficit of the general government primary balance of no more than EUR 340 million (2.1 percent of GDP) in 2015 and a surplus of at least EUR 201 million (1.2 percent of GDP) in 2016, respecting EDP recommendations of a headline deficit of no more than 6.3 percent of GDP in 2015 and 2.9 percent of GDP in 2016.
- After review and consultation with programme partners, adopt the 2015 and 2016 Budget Laws by December 2014 and December 2015, respectively.
- Update the 2014-2016 expenditure ceilings for 2015-2017 to accompany the 2015 Budget Law; document any deviation from the 2014-2016 framework and provide reasons to programme partners.
- In Q2-2016, present a provisional list of measures to attain a primary surplus of 3 percent of GDP in 2017 and 4 percent of GDP in 2018; include required measures in the draft 2017 Budget Law.
- Note: These targets need to be adjusted for expected dividends of EUR 0.2 billion, to be distributed by the CBC in line with CBC's duties under the Treaties and the Statute.

### 3. Fiscal-structural measures — Key objectives
- Improve efficiency of public spending and the budgetary process via an effective Medium-Term Budgetary Framework (MTBF) fully compliant with the Directive on requirements for budgetary frameworks and the TSCG.
- Control the growth of health expenditure.
- Enhance tax revenues by improving tax compliance and collection.
- Reform public administration to improve functioning and cost-effectiveness, including review of size, employment conditions and functional organisation of public services.
- Reform overall benefit structures to ensure efficient use of resources and balance between welfare assistance and incentives to work.
- Elaborate programme to improve efficiency of state-owned and semi-public enterprises and initiate a privatisation programme.

### Pension reform (3.1)
- Recent reforms (noted in Annex 1) have, according to actuarial study peer-reviewed in the Ageing Working Group in September 2013, adequately addressed the high projected increase in pension spending and secured long-term financial viability through 2060.
- Continue to monitor long-term financial sustainability and consider further reforms if needed.
- Authorities agreed to provide by February 2014 all information necessary to verify that measures aimed at the GEPS apply also to pension schemes in the broader public sector and to pension schemes for hourly-paid public employees, to the extent these fall under executive and legislative powers.

### Health care reform (3.2)
- Measures to strengthen sustainability and efficiency of public healthcare:
  - a) Preserve and implement all fiscal measures relating to compulsory health-care contribution for public servants and public servant pensioners; review these with programme partners by Q2-2014, and preserve all co-payments for using public health care services.
  - b) Restructure public hospitals according to the action plan approved by the Council of Ministers at end-June 2013, aiming at full implementation by Q2-2015.
  - c) Implement a National Health System (NHS), to be fully in place by mid-2016, ensuring financial sustainability and universal coverage; taking into account economic conditions, complimentary reforms, actuarial study results and consultation with programme partners. By mid-2015, a first stage of NHS (e.g., primary care) will be put into place. The first stage will be defined and adopted with the full roadmap to NHS by April 2014; the amending bill to NHS will be submitted to the House of Representatives by Q2-2014. Policies of the Ministry of Health on pricing and reimbursement, including pharmaceutical expenditure, will be revised in agreement with programme partners to contain projected NHS spending levels.
  - d) Secure adoption by the Council of Ministers of a binding set of contingency measures (e.g., revision of the basket of publicly reimbursable medical services and products, cuts in tariffs for medical products and providers, limits to volume of reimbursable products and services) by Q4-2014 to ensure agreed budget limits of public health expenditure are not exceeded.
  - e) Complete design of IT-infrastructure necessary for implementing NHS and explore cost-effective web-based alternatives to the current IT tender by Q1-2014.
  - f) Review income thresholds for free public health care compared to social assistance eligibility and ensure co-payments protect households from catastrophic health expenditures by Q2-2014.
  - g) Continue to publish clinical and prescription guidelines, audit their implementation, establish health-technology assessment system, conduct periodic reviews of the basket of publicly-reimbursable services based on objective, verifiable criteria including cost-effectiveness, and prepare quarterly reports on workstream results.
- Consider establishing a system of family doctors acting as gate-keepers for access to further levels of care.

### Budgetary framework and public financial management (3.3)
- Enact a Fiscal Responsibility and Budget System Law (FRBSL) applicable to the entire general government sector prior to the granting of the fourth disbursement of financial assistance. The FRBSL will encompass macro-fiscal policy-making, budget formulation, approval and execution, deepen provisions transposing Council Directive 2011/85/EU, implement Two-Pack EU Regulation 473/2013 and the Fiscal Compact (TSCG) based on Common Principles in Commission Communication COM(2012)342, and include implementing texts on budget documentation and statistics.
- Provide for establishment of a Fiscal Council with a statutory regime, functions, nomination procedures and funding arrangements grounded in the FRBSL, including an implementing text on Fiscal Council staff and a draft MoU on exchange of information between the Fiscal Council and the Ministry of Finance by mid-March 2014.
- Expenditure controls to avert overspending and arrears:
  - Ensure central government spending commitments are subject to pre-commitment validation by Q1-2014; timely record and report all outstanding commitments quarterly in the accounting system.
  - Improve monitoring of government guarantees through risk assessment analysis; ensure appropriate human resources at the Public Debt Management Office to conduct proper risk assessment of outstanding guarantees.

### Public-private partnerships (PPPs) (3.4)
- Regularly update the PPP inventory, including contingent liabilities, and include it in the annual budget law and annual financial report.
- Establish adequate legal and institutional framework for public investment projects and PPPs to assess fiscal risks and monitor execution by:
  - (i) establishing an effective gateway process to verify fiscal affordability of projects;
  - (ii) adapting fiscal management laws to formalize the role of the Minister of Finance and services (Ministry, Directorate General for European Programmes, Coordination and Development, and the Treasury) in reviewing and approving public investment projects and PPPs at critical gateway points;
  - (iii) developing financial reporting and accounting rules ensuring timely and transparent communication of public investment project and PPP obligations.
- Include legal basis for managing public investment and PPPs in the FRBSL.
- Implement secondary legislation and/or guidelines for public investment management, including project appraisals, in line with FRBSL provisions by June 2014.
- Commit not to enter into any new tendering process or sign any new PPP contract before implementing the legal and institutional PPP framework, excluding projects that reached commercial close by end-October 2012.

### State-owned enterprises and privatisation (3.5–3.6)
- Submit to the House of Representatives the law regulating creation and functioning of SOEs at central and local levels to enhance central administration monitoring and include SOE reporting in the annual budgetary procedure by end-February 2014; no additional SOEs will be created until legal framework adopted.
- Head of the new SOEs Unit and supporting staff to start work by end-March 2014.
- Submit a plan by Q2-2014 with detailed timelines for review and restructuring of SOEs under internal review.
- Each SOE to submit a strategic plan to the competent minister for approval, in consultation with programme partners, as set out in Part V of the SOEs Law by Q3-2014.
- Implement the privatisation plan to improve economic efficiency, competition, capital inflows and restore debt sustainability; plan includes privatisation of CyTA (telecoms), EAC (electricity), CPA (commercial activities of ports), and real estate and land assets.
  - CyTA and CPA to be privatised within the programme period and EAC by mid-2018.
  - Enact the Privatisation Law prior to the granting of the fourth disbursement of financial assistance.
  - Establish the Privatisation Unit and appoint its Head and experts; Unit to be fully operational by mid-May 2014. Terms of reference prepared in consultation with programme partners.
  - Appoint independent advisors and develop a plan with detailed intermediate steps and timings for disposing of identified real estate assets by Q3-2014.
  - Appoint independent advisors for CPA privatisation by Q2-2014 and for CyTA and EAC privatisations by Q3-2014, in accordance with the privatisation plan.
- The privatisation plan identified by the Government after consultation with programme partners will raise at least EUR 1 billion by the end of the programme period and an additional EUR 400 million by 2018 at the latest; proceeds will be used for public debt reduction.
- Ensure appropriate regulatory frameworks for privatization of natural monopolies and safeguard provision of basic public goods and services in line with national policy goals and EU law.

### Revenue administration, tax compliance, and international tax cooperation (3.7)
- Reform revenue administration to reinforce efficiency and effectiveness of revenue collection and fight tax fraud and evasion, comprising short-term measures to enhance compliance and a comprehensive long-term reform to establish a new integrated function-based tax administration structure integrating the IRD and VAT services.
- Most short-term programme implemented; following actions to be completed by Q1-2014:
  - Attribute personal responsibility for payment of company taxes to those who truly and effectively control a company (for non-listed companies) and to the responsible manager for fraudulent filing of company taxes.
  - Harmonise legislation among tax types so that not paying withholding taxes is a criminal offence and take necessary steps to ensure tax fraud is prosecuted as a criminal offence.
  - Strengthen powers of tax authorities to ensure payment of outstanding tax obligations, including powers to garnish assets or prohibit alienation or use of assets, including property and bank accounts.
  - Enact legislation to establish self-assessment for all income taxpayers by changing from pre-assessment verification of income tax returns to post assessment audits selected on basis of risk.
  - Conduct an independent formal review to recommend legislative changes to determine appropriate level of discretion available to tax administration management and how it is exercised.
- Long-term reform measures include:
  - A comprehensive compliance strategy to be put in place by Q2-2015, based on analytical work on risk identification and analysis and evaluation of risk treatment strategies.
  - Make data from IRD, VAT Services and Customs and Excise Department available to selected tax administration staff via one platform for integrated risk identification and analysis by Q1-2014.
  - Cleanse income tax registers by Q2-2014 and VAT registers by Q3-2013, removing inactive cases and put in place a process to maintain registers up-to-date.
  - Further improve joint work programme for large and high risk taxpayers and provide a progress report by Q2-2014.
  - Finalise the compliance risk management module for large taxpayers by Q3-2014.
  - Proceed with full integration of the two tax departments based on the adopted integration implementation plan; "As next steps, the authorities will, amongst others:" (text continues in source).

*Source: _cr1492 - 2. Fiscal policy*

### 1. submit to the House of Representatives the enabling legislation to establish the new

### _cr1492 - 1. submit to the House of Representatives the enabling legislation to establish the new

### Tax administration, information exchange, and large taxpayer unit
- Submit to the House of Representatives the enabling legislation to establish the new tax agency by April-2014.
- Set up the integrated large tax payer unit by Q4-2014.
- Reinforce the tax unit in the Ministry of Finance responsible for tax policy formulation and for monitoring the implementation of tax policy and the revenue performance (including by measuring the VAT gap) by Q2-2014.
- Safeguard the timely and effective exchange of information on tax matters, fully ensuring the applicability of laws and standards governing international exchange of tax information.
- Enhance timely delivery of relevant and accessible tax information to other EU Member States by:
  - fully transpose and implement Council Directive 2011/16/EU on administrative cooperation in the field of taxation and abide by Art 7 of the Directive and Art 10, 19 and 21 of Council Regulation 904/2010 on administrative cooperation and combating fraud in the field of value-added tax, which prescribe specific timeframes within which Member States shall provide information to each other;
  - ensure the systematic follow-up and use of information received from other countries about savings income payments received by Cyprus resident individuals and savings income payments received by entities and legal arrangements such as trusts under Cyprus law, notably entities and legal arrangements the beneficial owners of which are resident in other EU Member States;
  - improve capacity of the Inland Revenue Department to follow-up on tax information received from other countries, e.g. by permitting the department to access databases of other public entities in order to facilitate and expedite the identification of the taxpayer;
  - submit by end-February 2014 to programme partners a comprehensive action plan to address the shortcomings identified in Phase 2 of the peer review by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, with a view to achieve full compliance with the OECD supplementary review. The action plan shall be implemented by Q2-2014.
- Monitor closely further progress in responding timely to tax information requests by third countries and, starting from end-March 2014, submit to the programme partners quarterly performance updates.
- In the context of effective implementation of Council Directive 2003/48/EC on taxation of savings income in the form of interest payments (the EUSD):
  - continue to provide to the EC all necessary and available information/statistics extracted from the data exchanged under the FISC153;
  - on an annual basis and starting from the tax year ending on 31 December 2013, provide to the EC a breakdown of the information provided under the EUSD by sector of activity of the paying agents, including possible sanctions actually claimed of paying agents for their application of the EUSD;
  - in 2015, provide to the European Commission a report on the results of audits conducted in 2014.
- The Cypriot authorities (CBC) will provide on an annual basis detailed sectoral deposit statistics with a breakdown of non-resident deposits by country.

### Immovable property tax reform
- Reform the immovable property tax to improve fairness of the tax burden and increase efficiency of the tax administration.
- Implement a General Valuation (GV) for all immovable properties. The new values of immovable properties shall be determined on the basis of tangible building- and plot-related characteristics by Q2-2014.
- Implement the recurrent immovable property tax based on the updated valuations for the tax year 2015, at the latest. The design of the immovable property tax shall ensure progressivity and proceeds consistent with measure I.27 of Annex 1.
- The Department of Lands and Surveys (DLS) and the Inland Revenue Department will prepare by Q1-2014 a joint action plan outlining the required intermediate steps and deadlines to ensure smooth and timely implementation of the new immovable property tax.
- Additional measures and deadlines:
  - by Q4-2014, conduct an assessment of the relevance of the parameters used in the Computer Assisted Mass Appraisal (CAMA) model for the GV and identify possible missing parameters. Refine, if needed, the CAMA in light of this assessment by Q2-2015;
  - conduct an assessment of the variance between GV assessed values and market price by Q4-2014. On this basis and following international best practices, by Q1-2015 enact legislation specifying the frequency of the mandatory update of the values;
  - implement by Q2-2015 the recommendations of a study on the scope for consolidating the collection and administration of the municipal recurrent property tax and sewage tax. The study will also review existing exemptions and derogations from property taxation and report on the scope for shifting revenues from transaction fees and taxes to recurrent taxation.

### Public administration reform
- Commission an independent external review of possible further reforms of the public administration with horizontal and sectoral elements.
- Horizontal element (undertaken by the World Bank and the UK public administration) will include reviews of:
  - the appropriate system of remuneration and working conditions/conditions of employment in the public sector (e.g. annual vacation leave, sick leave, maternity leave, working time), in relation to the private sector and to other EU countries and based on best practices;
  - the introduction of a new performance based appraisal system in the public sector, for development and promotion purposes, linking performance with the remuneration system/increments.
- The results of the horizontal review will be presented by Q3-2014. Based on the findings, the Cypriot authorities will agree on a reform after consultation with the programme partners, submit it to the House of Representatives for approval and implement it by Q4-2014.
- Sectoral element will examine:
  - the role, competences, organisational structure, size and staffing of relevant ministries, services and independent authorities;
  - the possibility of abolishing, merging or consolidating non-profit organisations or companies and state-owned enterprises;
  - the possibilities for the re-organisation and re-structuring of local government.
- Sectoral element comprises two batches:
  - First batch (World Bank and UK public administration): covers the Ministries of Agriculture, Education and Health, local government and the Department of Registrar of Companies. Results presented by Q1-2014. Based on findings, agree on a reform plan after consultation with programme partners, approve by the Council of Ministers by Q2-2014. Relevant legislation for high priority reforms adopted by the House of Representatives by Q3-2014. Reform will start to be implemented by Q4-2014 in accordance with the reform plan.
  - Second batch: covers remaining Ministries (Labour and Social Insurance, Communications and Works, Energy, Commerce, Industry and Tourism, Interior, Defense, Justice and Public Order, Foreign Affairs), and the Ministry of Finance, including the Treasury and the Planning Bureau being covered under the PFM; includes all SOEs (subject to decisions in 3.5 regarding privatisation, restructuring or liquidation); covers the President’s Office and the Council of Ministers, as well as the Constitutional and Independent Services. Results presented by Q4-2015 and will include cost estimates and implementation timelines with detailed intermediate steps. Based on findings, agree on a reform plan after consultation with programme partners, approve by the Council of Ministers by Q1-2016. Relevant legislation for high priority reforms adopted by the House of Representatives by Q2-2016. Reform will start to be implemented by Q3-2016 in accordance with the reform plan.
- Review the impact of changes to public sector working hours and present findings to the programme partners by Q4 2014.

### Welfare system reform
- Implement the reform plan of the welfare system as of 1 July 2014 to ensure efficient use of public funds, balance welfare benefits and incentives to take up work, and enhance protection of vulnerable households.
- Reform objectives and approach:
  - consolidate existing social benefits by streamlining, inter alia by merging some benefits and phasing out others, and integrating them under the Ministry of Labour and Social Insurance;
  - improve the targeting of benefits;
  - provide work incentives to avoid welfare dependency.
- Specific steps and deadlines:
  - On the basis of the level of the minimum consumption basket covering basic needs to achieve a decent standard of living, define the level, the composition and the eligibility criteria of the new guaranteed minimum income scheme (GMI) which will replace the existing public assistance scheme and estimate its overall costing by end-February 2014;
  - refine the means testing mechanism by introducing a common definition of income sources, financial assets and movable and immovable property, so as to ensure the consistency of eligibility criteria across different benefit schemes by end-February 2014;
  - adopt the final design of the reformed welfare system by the Council of Ministers by Q1-2014 after consultation with social partners, followed by consultation and review by programme partners. The adopted reform would define all benefits, their respective level, and eligibility criteria, as well as the overall costing of the system;
  - ensure that a comprehensive database and the necessary IT requirements are in place to support the administration of the reformed welfare system by May 2014;
  - transfer all relevant competences and responsibilities related to the administration and provision of all social benefits to the Ministry of Labour and Social Insurance, which should be appropriately equipped in terms of financial and human resources, the latter being reassigned from other departments of the public administration by April 2014, except the benefits to be provided by the Ministry of Education and Culture (education benefits) and the Ministry of Interior (benefits to displaced people).
- The reformed welfare system must be consistent with the fiscal targets defined in this MoU. Draft legislation will be submitted for review to the programme partners before submission to the House of Representatives. The law will be adopted by end-May 2014.

### Labour market: objectives and reforms
- Key objectives:
  1. implement a reform of the system of wage indexation commensurate with ensuring a sustainable improvement in the competitiveness of the economy and allowing wage formation to better reflect productivity developments;
  2. prepare and implement a comprehensive reform of public assistance to balance public assistance and incentives to take up work, target income support to the most vulnerable, strengthen activation policies and contain the public finance impact of rising unemployment;
  3. help attenuate adverse competitiveness and employment effects by linking any change in the minimum wage to economic conditions.
- Cost of living adjustment (COLA) reform for wages and salaries:
  - Reform the wage-setting framework for the public and private sector to improve real wage adjustment.
  - Changes to indexation system:
    i. base period for calculating COLA lengthened from six months to twelve months; indexation would take place on 1st January each year;
    ii. introduce a mechanism for automatic suspension of application and derogation procedures during adverse economic conditions: if in the second and third quarters of a given year negative rates of growth of seasonally adjusted real GDP are registered, no indexation would be effected for the following year;
    iii. move from full to partial indexation, with the rate of wage indexation being set at 50 percent of the rate of increase of the underlying price index over the previous year.
  - As foreseen in section I.2 (Annex 1) of this agreement, the suspension of wage indexation in the wider public sector will remain in place until the end of the programme.
  - A tripartite agreement will be pursued with social partners for the application of the reformed system in the private sector by Q2-2014.
- Minimum wage:
  - Over the programme period, any change in the minimum wage covering specific professions and categories of workers should be in line with economic and labour market developments and will take place only after consultation with the programme partners.
- Activating the unemployed and combating youth unemployment:
  - Reform public assistance to ensure it serves as a safety net and safeguards incentives to take up work, consistent with the welfare reform in section 3.11.
  - Identified challenges: difficulties of the Public Employment Services to serve increased numbers of unemployed; lack of coherent framework for continuous monitoring and evaluation of schemes; need for increased coordination across ministries; absence of a data warehouse impeding automatic processing and exchange of information.
  - Agreed measures to address shortcomings:
    i. develop a coherent methodology for the continuous monitoring and evaluation of activation programmes, to be applied consistently across schemes. A comprehensive report will be presented by Q3-2014 and the new methodology will be applied thereafter;
    ii. complete harmonisation, automatic collection, processing and exchange of data across schemes and between implementing bodies by Q1-2014;
    iii. ensure effective integration of different schemes by centralising administration of all activation programmes and enhancing coordination across responsible departments;
    iv. enhance administrative capacity of the public employment services via increased staff mobility and/or outsourcing of specific tasks by Q2-2014;
    v. enhance cooperation between the public employment services and benefit-paying institutions in the activation of the unemployed.
  - Youth employment measures:
    - Present by April 2014 the revised National Action Plan for Youth Employment, including measures envisaged for support under the Youth Employment Initiative aimed at establishing a Youth Guarantee, in line with the conclusions of the European Council of June 2013.
    - Ensure design, management and implementation of youth-targeted measures are integrated within the broader activation system (section 4.3), coherent with the reform of the social welfare system (section 3.11) and the agreed budgetary targets.
    - Submit by April 2014 a comprehensive note summarising the full list of all active labour market policies (existing and envisaged) with the relevant intended aims, recipients, budgetary allocations and sources of financing.

*Cyprus — International Monetary Fund (excerpts as provided in the source content)*

### 5.  Goods and services markets

### 5.  Goods and services markets

### Key objectives
- Address structural issues to rebalance the Cypriot economy, restore growth potential, and improve competitiveness.
- Remove unjustified obstacles in services markets, given the services-intensive nature of the economy, to significantly impact growth.
- Improve quality and reduce cost of regulated professional services to benefit the business environment and Cyprus' competitive position.
- Reinvigorate tourism competitiveness—tourism is one of Cyprus' largest sectors and an important potential driver of future growth.
- Improve regulation and administration related to the real estate sector to support housing market functioning and foster foreign demand amid downside risks.
- Exploit domestic offshore natural gas potential to reduce energy import dependency and improve security and sustainability of energy supply; positive fiscal/current account effects contingent on financing, infrastructure planning, efficient energy market design, and adequate regulatory regime.

### Services Directive and regulated professions
- Authorities ready to adopt further necessary amendments toward full implementation of the Services Directive.
- Rules referring to the calculation of fees for professional services (including those adopted by professional bodies) must be assessed for compliance with internal market and competition principles; opinion of the Commission for the Protection of the Competition (CPC) and programme partners required.
- Comprehensive review of requirements affecting access and exercise of activity for regulated professions (lawyers, engineers, architects) to be finalized by Q1-2014.
- Requirements judged not justified or proportional will be eliminated by Q3-2014 following the review.

### Competition, transparency and sectoral regulatory authorities
- Strengthen independence and effectiveness of the Commission for the Protection of Competition (CPC) by:
  - continuing to provide sufficient and stable financial means, and qualified personnel to enhance effective and on-going operation by Q2-2014;
  - adopting necessary amendments to legislation on mergers and antitrust, including the power to conduct sector enquiries by end-March 2014;
  - promoting a more active advocacy role for the CPC to safeguard and promote competition by Q2-2014; the CPC may seek technical assistance.
- Ensure by Q2-2014 that the General Auditor's Office has sufficient financial means and personnel to carry out its functions and increased tasks as stipulated by the European Commission's Monitoring Report (Chapter 28, Financial Control/External Audit) and the 2014 EU Anti-Corruption Report.
- Continuously ensure powers and independence of the National Regulatory Authorities (NRAs) are effective in accordance with the EU Regulatory Framework.

### Housing market and immovable property regulation
- Actions required to ensure property market clearing, efficient seizure of collateral, and restoring demand; legal disputes pose particular risk due to incomplete documentation and slow judicial procedures.
- Cypriot authorities will:
  - define deadlines for issuance of building certificates and title deeds and ensure enforcement by Q1-2014;
  - ensure that the title deed issuance backlog drops to less than 2,000 cases of immovable property units with title deed issuance pending for more than one year by Q4-2014 (backlog refers to (i) applications, (ii) units that are eligible for the "ex officio" issuance of title deeds, required certificates and permits). The ex-officio cases will automatically be counted in the backlog from the date the certificate of final approval is being issued by the respective Local or District Authority;
  - prepare a joint action plan to streamline processes within the Department of Lands and Surveys (DLS) and between the DLS, the Local and District Authorities and the Ministry of Interior Technical Services by Q2-2014;
  - publish quarterly progress reviews every three months, including executive commentaries on developments related to issuance of building and planning permits, certificates, title deeds, title deed transfers and related mortgage operations;
  - implement electronic access to registries of title deeds, mortgages, sales contracts and cadastre for the monetary financial institutions and for all government services by Q4-2014;
  - improve pace of court case handling to eliminate court backlogs by Q1-2016.

### Tourism
- Recognized as one of Cyprus' largest economic sectors and a potential driver of future growth and employment; a reinvigoration of competitiveness is necessary.
- Cypriot authorities will:
  - present a progress report on implementation of the action plan twice per year including an assessment based on performance indicators, by Q1 and Q3 every year, starting from 2014;
  - present a plan enhancing coordination of competent authorities with direct link to tourism by Q2-2014; the plan shall include concrete actions and a roadmap to an effective coordination mechanism;
  - start implementing an aeropolitical strategy to adapt Cyprus' external aviation policy, taking into account the EU external aviation policy and EU aviation agreements, while ensuring sufficient air connectivity. This strategy, including a concrete action plan, will be adopted by Q1-2014. Implementation of the action plan will be reviewed annually by the Cypriot authorities, starting in Q1-2015.

### Energy
- Authorities will:
  - ensure, without delay, that the Third Energy Package is fully and correctly implemented, particularly during and after the transformation of the sector;
  - formulate a comprehensive strategy for rearrangement of the Cypriot energy sector in the form of a concise summary report (first draft to be delivered by Q4-2014) and a collection of more detailed reports. The strategy is a living document to be developed and updated under full authority of the Government and must include at least three key, interdependent elements to be developed in parallel:
    1. updates on roll-out plan for infrastructure required for exploitation of natural gas—covering required investments, associated costs, financing sources and methods, related ownership structure, related major planning risks and bottlenecks, projection of revenue streams over time, and an appropriate sales framework for off-shore gas supply (exports and domestic); next update by Q2-2014.
       - Prior to finalisation of the forthcoming energy sector Government Agreement (GA) and supplementary agreements with Contracting Parties to a Production Sharing Contract, authorities will undertake a financial and budgetary impact analysis of the GA and its supplementary agreements. The impact assessment will evaluate potential financial and budgetary impacts on the general government position of various options for an LNG project development plan and financing arrangements, with focus on budgetary commitments that may arise before or at the time of taking the final investment decision. The GA and supplementary agreements shall be consistent with the fiscal targets until 2016 and thereafter, as defined in this MoU.
    2. a comprehensive outline of the regulatory regime (CERA) and market organisation for the restructured energy and gas sector to introduce open, transparent, competitive energy markets, taking into account: size of the Cypriot economy; integration into regional markets; principle of independent regulatory oversight; prospects of privatisation of SOEs in the energy sector; EU targets for energy efficiency, renewable energy and carbon emissions. The outline should include: description of envisaged institutional framework; type and scope of regulatory instruments; different forms of government ownership and involvement; sequence and envisaged timing of major actions; potential for setting-up wholesale markets for gas and electricity (electricity market open to non-producing traders); freedom for customers to choose supplier; full unbundling of gas suppliers and customers, in particular electricity companies. Authorities will provide clarity on intended use of 'isolated market' and 'emergent market' derogations and indicate duration of the latter. An advanced intermediate draft by Q2-2014, with view to a final outline by Q4-2014.
    3. a plan to establish institutional framework for management of hydrocarbon resources, including a resource fund to receive and manage public revenues from offshore gas exploitation and sales (direct revenues, fees, dividends etc). Preparatory phase should include required legal steps and their adoption. The resource fund should have a solid legal base and governance structure drawing on internationally-recognized best practices. The resource fund, whose establishment and objectives are foreseen in the FRBSL (see 3.3), should be based on clear rules governing inflows and outflows, coupled with clear accounting rules regarding dividend and fees from government entities and stakes in the energy sector. Where the FRBSL does not cover elements listed above, they should be provided for by the specific law on the resource fund; an advanced draft of this law, informed by technical assistance advice, will be submitted to programme partners by Q2-2014, before submission to the House of Representatives.
- Strategy should take into account uncertainty about size of domestic, offshore, commercially-viable natural gas fields and possible changes in international gas prices and demand; appropriate data should be based on alternative world energy scenarios from an internationally-reputed organisation.
- Strategy will be based on an appropriate level of technical assistance on technical aspects.

### Technical assistance
- Given structural challenges, lack of specific skills in some areas, and scarcity of resources, Cypriot authorities will provide an updated request for technical assistance needs during the programme period, including on-going technical assistance projects by end-June 2014.
- The request will identify and specify areas of technical assistance or advisory services considered essential for implementation of the MoU and where authorities intend to seek such assistance, in coordination with programme partners.
- All technical assistance provided by the European Commission, other than technical assistance provided directly under the Structural and other EU funds, will be coordinated by the Support Group for Cyprus.

### Growth Strategy
- Develop a comprehensive and coherent growth strategy based on Cyprus' competitive advantages to help kick-start the economy.
- Growth strategy should be integrated into the national institutional framework leveraging on on-going public administration reform, public financial management reform, other commitments in Cyprus' Economic Adjustment Programme and relevant EU initiatives.
- Cypriot authorities may request technical assistance to further develop this strategy.

*Source: 5. Goods and services markets (chapter content as provided).*

### 0.5 percent per month for retirements earlier than the statutory retirement age at the latest

### _cr1492 - 0.5 percent per month for retirements earlier than the statutory retirement age at the latest

### Pension and social security reforms
- Freeze pensions under the Social Security Fund for the period 2013-2016.
- Abolish the increase of pensions for a working dependent spouse under the General Social Insurance Scheme at the latest from January 2013 onwards.
- Increase the minimum age for entitlement to an unreduced pension by 6 months per year to be brought in line with the statutory retirement age (planned increase to reach 65 by 6 months per year between 2013 and 2016).
- Introduce an early retirement penalty of 0.5 percent per month of early retirement so as to make early retirement actuarially neutral.
- Introduce an automatic adjustment of the statutory retirement age every 5 years in line with changes in life expectancy at the statutory retirement age, to be applied for the first time in 2018.
- Gradually (1 year per year) extend the minimum contributory period in the system from the current 10 years to at least 15 years over the period 2013-17 (in place since December 2012).
- Ensure that pension entitlements that will accrue after 1 January 2013 are considered as personal income, thus becoming fully taxable also in the case in which they are received as a lump-sum payment; employees will be granted the option of converting all or part of the lump-sum into an actuarially neutral annuity (in place since January 2013).
- Implement a scaled reduction in emoluments of public and broader public sector pensioners and employees as follows:
  - EUR 0-2.000: 0.8 percent
  - EUR 2.001-3.000: 1 percent
  - EUR 3.001-4.000: 1.5 percent
  - above EUR 4001: 2.0 percent
- Further targeting of social pensions; abolition of income tax exemption for certain pension schemes.

### Expenditure reductions and public sector measures
- Reduce transfers by EUR 25 million from central government to state-owned enterprises and semi-public institutions.
- Ensure a targeted reduction of budgetary appropriations for a series of semi-governmental organisations in the 2013 Budget Law, supported by well-defined activity-reducing measures.
- Implement a four-year plan aimed at the abolition of at least 1880 permanent posts over the period 2013-2016.
- Additional healthcare expenditure control measures (I.17):
  - Abolish beneficiary class "B" and all exemptions for access to free public health care based on all non-income related categories except for persons suffering from certain chronic diseases depending on illness severity.
  - Introduce a compulsory health care contribution for public servants and public servant pensioners of 1.5 percent of gross salaries and pensions; measure to be reviewed by Q2-2014; participation voluntary for families with three or more dependent children.
  - Increase fees for medical services for non-beneficiaries by 30 percent and create a co-payment formula with zero or low admission fees for visiting general practitioners; increase fees for higher levels of care for all patients irrespective of age.
  - Introduce effective financial disincentives for using emergency care services in non-urgent situations.
  - Introduce financial disincentives (co-payment) to minimise provision of medically unnecessary laboratory tests and pharmaceuticals.
  - Adopt a restructuring plan for public hospitals implementing recommendations from the 2009 "Public Hospital Roadmap".
- Reduce expenditure on various housing schemes by at least EUR 36 million by consolidating and streamlining schemes, discontinuing the special grant for acquiring a first residence and ceasing loans and loan guarantees under government-administered housing schemes.
- Further streamline the Easter allowance to pensioners by limiting the benefit to pensioners with a monthly per household income of at most EUR 500.
- Implement additional expenditure savings in 2014:
  - Reduction in total outlays for social transfers by at least EUR 28.5 million through streamlining and better targeting of child benefits and educational grants, and abolition of social cohesion benefits.
  - Implement a further reduction in emoluments of public and broader public sector employees and pensioners by a flat rate reduction of 3 percent on all wages.
  - Introduce a fee on monthly transportation cards for students and pensioners.
  - Structural reforms in education in 2014 including reduction of seconded teachers, removal of 1:1.5 teaching time ratio from evening schools, elimination of teaching time concessions for multi-district placement, elimination of mentoring components for training of newly appointed teachers, and reduction of cost of afternoon and evening programmes.
  - Ensure additional expenditure savings by further reduction of public sector allowances and streamlining overtime compensation, including revising the formula for calculating overtime compensation and applying pro rata to hourly paid employees.
  - Abolition of income tax exemption for certain pension schemes; reduction in the tax-free threshold for lottery gains.

### Revenue and tax measures
- Increase excise duties on tobacco products, in particular on fine-cut smoking tobacco, from EUR 60/kg to EUR 150/kg.
- Increase excise duties on cigarettes by EUR 0.20/per packet of 20 cigarettes.
- Increase excise duties on beer by 25 percent from EUR 4.78 per hl to EUR 6.00 per hl per degree of pure alcohol of final product.
- Increase excise duties on ethyl alcohol from EUR 598.01 to EUR 956.82 per hl of pure alcohol.
- Increase excise duties on energy by increasing the tax rate on motor fuels (petrol and gasoil) by EUR 0.07.
- Increase the standard VAT rate from 17 percent to 18 percent (I.24).
- Introduce a tax of 20 percent on gains distributed to winners of betting by OPAP and the National Lottery for winnings of EUR 5,000 or more.
- Abolish all exceptions currently in place for paying the annual company levy of EUR 350.
- Ensure additional revenues from property taxation of at least EUR 75 million by: (i) updating the 1980 prices through application of the CPI index for the period 1980 to 2012; and/or (ii) amending tax rates and/or (iii) amending value bands.
- Increase the statutory corporate income tax rate to 12.5 percent.
- Increase the tax rate on interest income to 30 percent.
- Increase the bank levy on deposits raised by banks and credit institutions in Cyprus from 0.11 percent to 0.15 percent with 25/60 of the revenue earmarked for a special account for a Financial Stability Fund.
- Complete the increase in fees for public services by at least 17 percent of the current values.
- Fiscal measures with effect in 2014 — revenue changes:
  - Extend the application of the temporary contribution on gross earnings and pensions of public and private sector employees up to 31 December 2016 as follows:
    - EUR 0 – 1,500: 0 percent
    - EUR 1,501 – 2,500: 2.5 percent
    - EUR 2,501 – 3,500: 3.0 percent
    - > EUR 3,501 - : 3.5 percent
  - Increase the standard VAT rate from 18 percent in 2013 to 19 percent in 2014.
  - Increase the reduced VAT rate from 8 percent to 9 percent.
  - Increase excise duties on energy by increasing the tax rate on motor fuels (petrol and gasoil) by EUR 0.05.
  - Increase contributions, as of 1.1.2014, of salaried employees and employers to the GSIS by an additional 1 percentage point on pensionable earnings, i.e. 0.5 of a percentage point from employees and 0.5 of a percentage point from employers and 1 percentage point in the case of self-employed persons.
  - Reform the tax system for motor vehicles with effect from budget year 2014 to raise additional revenues through the annual road tax, the registration fee and excise duties, including motor fuel duties.
  - Introduce a contribution of 3 percent on salaries of casual employees servicing on a contract basis, who receive gratuity, including volunteers of 5 years services and police constables.

### AML/CFT Action Plan — customer due diligence and entity transparency (Annex 2)
- Customer Due Diligence (CDD)
  - 1.1 Business profile: CBC to provide guidance to ensure adequate training for staff establishing customer business relationships and opening accounts. Status: Compliant.
  - 1.2 Customer risk profile: CBC to provide guidance for sound and effective risk management systems covering customers, products and services, geographical locations/areas, and delivery channels; policies to be submitted to the board for approval annually or as required by business model changes. Status: Compliant. Timeline: Q1-2014 for new legislative measures on tax crimes as predicate offences.
  - 1.2.3 CBC to issue guidance to identify and establish source of wealth for PEPs. Status: Compliant.
  - 1.3 Ongoing CDD: CBC to issue guidance to ensure enhanced ongoing monitoring for higher risk clients including PEPs; ensure updated CDD measures. Status: Compliant. Timeline: Q2-2014.
- Reliance/introduced business
  - CBC to review, strengthen, and amend regulatory framework relating to the use of introducers/third parties. Status: Compliant.
  - CBC to reiterate and clarify training obligations under CBC directive; ensure implementation and include information on current ML and TF techniques. Status: Ongoing.
  - CBC to establish co-operation mechanisms with CySEC, the Cyprus Bar Association and ICPAC. Status: Compliant.
- Suspicious Transaction Reporting
  - MOKAS to reiterate and clarify STR requirements, including duty to report tax crimes as of December 2012, with training and coordination. Timeline: Q1 - 2014.
- Transparency of beneficial ownership
  - 4.1.1 Revise Trust and Company Services Providers Law and AML Law to ensure adequate, accurate and timely beneficial ownership information; revise directives and circulars issued by supervisory authorities. Status: Compliant.
  - 4.1.2 In the case of nominees, require nominee directors and nominee shareholders either to disclose the identity of their nominator to the company and register or require nominees be authorised or regulated and maintain information on the identity of their nominator; record of nominee status accessible through registers under the TCSP Law. Status: Compliant.
  - 4.2 Company Registry: carry out a third party review of the Companies’ Registrar and ensure appropriate resourcing. Status: Compliant. Timeline: Ongoing.
  - 4.3 Register of Trusts: CY to establish trust registries for all express trusts under CY law with trustee name and address accessible by supervisory authorities. Status: Compliant.
- Supervision of financial institutions
  - 5.1 Revise AML/CFT supervisory structure within the CBC to address AML/CFT matters and ensure adequate resources and technical capacity; hire AML/CFT experts if necessary. Status: Compliant/Ongoing.
  - 5.2 Develop risk-based offsite supervisory tool(s) for pilot group covering inherent ML/TF risks, internal control assessment, institutional risk profiles, and supervisory strategies. Status: Compliant.
  - 5.3 Develop risk-based onsite inspection tools and examination procedures covering Corporate Governance, Risk Assessment Systems, Policies & Procedures, Compliance Function, Internal & External Audit Functions, Training Program. Timeline: Q1 – 2014.
  - 5.4 Establish formal AML/CFT training program for CBC staff; develop and deliver customised training on offsite/onsite tools, CDD, monitoring, STR identification and reporting, funds transfers, correspondent banking, recordkeeping, compliance, audit, corporate governance, and risk assessment systems. Timeline: Q2 – 2014; ongoing training thereafter.
  - 5.5 Implement adequate supervision:
    - 5.5.1.a CBC to establish corrective actions and follow-up on cases revealed by Deloitte. Status: Compliant. Timeline: Q1-2014.
    - 5.5.1.b Apply appropriate enforcement actions and sanctions if applicable. Status: Compliant.
    - 5.5.2 CBC to quarterly share anonymised supervisory assessments and enforcement information with programme partners starting Q4 2013. Status: Ongoing.
    - Subsequent steps after development of tools (Q2 - 2014): implement and adjust offsite analytical tools; assign institutional ML/TF risk profiles; develop customised supervisory strategies; apply tools and strategies to all financial institutions.
    - 5.5.4.1 Start implementing new examination/verification procedures in line with 2014 inspection program. Timeline: Q2 - 2014.
    - 5.5.4.2 Update institutional risk profile and supervisory strategy based on pilot inspection results. Timeline: Q2 - 2014.

*Source: _cr1492 - 0.5 percent per month for retirements earlier than the statutory retirement age at the latest*

### 6. Supervision and

### 6. Supervision and monitoring of lawyers, accountants and TCSPs

### 6.1 Align resources with risks
- 6.1.1 Ensure adequate human resources and technical capacity to undertake effective AML/CFT monitoring.
- The level of resources should be commensurate with the size, complexity, and risk profiles of each business and professional.
- To meet this objective, if deemed necessary by the supervisory authorities, hire AML/CFT experts with the necessary professional skills and experience (e.g. professionals having performed monitoring or supervision of these professions abroad) – subject to necessary confidentiality restrictions.
- Timing/status: Ongoing

### 6.2 Develop risk-based tool(s) for Offsite surveillance/monitoring activities prior to implementation
- 6.2.1 Design, develop, adopt, and pilot a risk assessment methodology and tool(s) that provides for:
  - a comprehensive analysis of inherent ML/TF risks within the following risk factors: customers, products & services, geographic locations/areas, and delivery channels;
  - an assessment of the internal control environment that should be in place to mitigate and/or control the inherent ML/TF risks, as identified and measured;
  - risk profiles;
  - specific AML/CFT monitoring strategies (adapted to institutional risk profiles).
- Timing/responsibility:
  - Q1-2014 (CBA and ICPAC)
  - Q3-2014 (CySEC)
- 6.2.2 Implementation and piloting steps:
  - 6.2.2.1 Implement the new offsite analytical tool(s) through pilot reviews of a selected group of business and professionals. Adjust/fine-tune the offsite analytical tool(s) using the results of the pilot reviews.
  - 6.2.2.2 Assign ML/TF risk profiles to businesses and professionals reviewed under the pilot exercise.
  - 6.2.2.3 Apply the risk-based off-site analytical tools, assign ML/TF risk profiles, and developed customized supervisory strategies to all business and professions under monitoring.
- Timing/responsibility:
  - Q2-2014 (CBA and ICPAC)
  - Q3-2014 (CySEC)

### 6.3 Develop risk-based tool(s) for Onsite inspections prior to implementation
- 6.3.1 Design and develop a methodology for onsite activities, including the necessary examination/verification procedures for onsite inspections. Examination procedures should include, at a minimum:
  - Risk Assessment Systems
  - Policies & Procedures
  - Compliance Function
  - Training Program
- Timing/responsibility:
  - Q2 – 2014 (CBA and ICPAC)
  - Q3-2014 (CySEC)

### 6.4 Establish Formal AML/CFT Training Program
- 6.4.1 Establish formal AML/CFT training program and develop and deliver customised AML/CFT training courses.
- Develop and deliver customised AML/CFT training to supervisory staff in topics including, but not limited to:
  - newly developed offsite and onsite risk-based tools
  - customer acceptance policies
  - customer due diligence (CDD)
  - monitoring of transactions
  - identification and reporting of STR
  - recordkeeping
  - compliance function
  - risk assessment systems
  - etc.
- Timing/responsibility:
  - Q2– 2014 (CBA and ICPAC)
  - Q4-2014 (CySEC)

### 6.5 Implement adequate supervision
- 6.5.1 On a quarterly basis, in the context of the programme review, starting Q4-2013, the CySEC, CBA and ICPAC will, on a confidential basis, share anonymised information with the programme partners by granting access, to supervisory assessments and information about enforcement actions applied for non-compliance and /or violations of laws and regulations.
  - Timing/status: Ongoing
- Subsequent to the successful development of the tools stipulated under 6.2 and 6.3, the Supervisory authorities will undertake the following:
  - 6.5.2 Implement the new offsite analytical tool(s) through pilot reviews of a selected group of lawyers, accountants and TCSPs. Adjust/fine-tune the offsite analytical tool(s) using the results of the pilot reviews, and come-up with a supervisory program for 2014.
    - Timing/responsibility:
      - Q3 – 2014 (CBA and ICPAC)
      - Q4-2014 (CySEC)
  - 6.5.3 Implement the new examination/verification procedures through pilot onsite inspections of a selected group of lawyers, accountants and TCSPs. Adjust/fine-tune the procedures using the results of the pilot inspections.
    - Timing/responsibility:
      - Q3 – 2014 (CBA and ICPAC)
      - Q4-2014 (CySEC)

*Source: _cr1492 - 6. Supervision and*

### 2014. Moreover, wages in both the public and private sectors have been reduced

### _cr1492 - 2014. Moreover, wages in both the public and private sectors have been reduced

### Adjustment and labour costs
- Wages in both the public and private sectors "have been reduced considerably."
- Eurostat reported Cyprus saw a decline in its labour costs of 6.5 percent in Q4 2013, "the sharpest adjustment across the eurozone."
- Public sector workforce "was significantly reduced" over the last year, with employees "numbering at their lowest level since 2007."
- Further public sector reductions are expected via early retirement schemes as SOEs prepare for privatisation.

### External sector and current account
- Cyprus’s small size and open economy facilitated adjustment of the current account.
- Current account moved to a small surplus of 0.3 percent of GDP in Q3 2013 from a deficit of 5.7 percent of GDP a year earlier.
- Improvement driven largely by a notable decline in the import of goods and better export performance; higher tourism receipts were partly offset by further decline in the export of financial and other business services.

### Public finances and fiscal consolidation
- The 2014 budget adds consolidation "on top of programme requirements," bringing total fiscal adjustment for 2013-14 to around 10 percent of GDP.
- Performance through end-December 2013: primary balance of -1.7 percent of GDP for 2013 versus an adjusted forecast of -3.2 percent of GDP.
- For 2014, the primary deficit target was reduced to 2 percent of GDP from 3.3 percent of GDP to reflect over-performance in 2013 and high expected dividend income.
- January 2014 numbers pointed to a primary surplus of 1 percent of GDP compared to a programmed 0.4 percent of GDP.
- Staff suggested temporarily accommodating shortfalls should the 2013 overperformance prove temporary, to be balanced with authorities’ strategy and discussed with international partners.

### Financial sector stabilization and measures
- Deposit base: €46.9 billion in January 2014, from €47 billion in December 2013 and €47.2 billion in November 2013.
- Release of about €1 billion of previously frozen deposits at end-January contributed to deposit stability.
- Restructuring plans approved for Bank of Cyprus (BoC) and the Cooperative Sector by the Central Bank and European Commission.
- Injection of €1.5 billion of state funds into the Cooperative Central Bank, bringing the entire core domestic financial sector’s capital to around 16 percent of risk weighted assets.
- Banking sector restructuring measures include branch closures, voluntary staff redundancy schemes, and wage cuts to reduce operating costs.
- Banks are establishing specialized units for troubled borrowers; authorities are revising legal and operational frameworks to facilitate voluntary workout of non-performing loans.
- Reforms include insolvency reform, revised foreclosure procedures, the Central Bank’s Mortgage Arrears Management Framework, the Code of Conduct for borrowers and creditors, and a loan origination directive.
- Low liquidity buffers restrict credit provision; private sector credit contraction accelerated to about -10 percent y-o-y by January 2014.
- Authorities approved issuance of guarantees of up to EUR 2.9 billion on January 27 as contingency collateral.
- ECB accommodative monetary policy and collateral policies have been broadly supportive.
- February 2014: authorities completed the last milestone related to the second stage of relaxations under capital controls: abolition of automatic renewal of fixed-term deposits upon maturity and further increases in limits for domestic transfers.
- Third stage of relaxations (removing restrictive measures on cash withdrawals and prohibition on opening new accounts) pending on tangible progress with BoC’s restructuring plan; merging the 93 Coops into 18 institutions was completed as of March 24.

### Structural reforms and public administration
- Government advancing comprehensive social welfare reform introducing a general minimum income for vulnerable groups, financed by consolidating and better targeting other social benefits within the 2014 envisaged envelope; intended roll-out by June 2014.
- Revenue administration reform to integrate the Inland Revenue Department and VAT services into a new function-based tax administration; enabling legislation to establish the new integrated tax agency to be adopted by July 2014.
- Short-term measure: targeted joint audits running through the year to enhance voluntary compliance.
- March 20 legislation submitted to Parliament to provide revenue administration authority to seize assets, including property and bank accounts, and prohibit alienation or use of assets in cases of noncompliance.
- House adopted the Fiscal Responsibility and Budget Systems Law in mid-February as a prior action for the review; Law provides legal basis for macro-fiscal policy-making, budget formulation approval and execution, and establishment of a Fiscal Council.
- Cyprus Privatization Plan adopted by the House earlier in the month; Council of Ministers launched privatisation procedures for the Limassol port by liberalizing the port’s commercial arm.
- A unit to manage privatization to be established by mid-May; financial advisors for major transactions relating to largest state-owned enterprises to be appointed by end-September.
- Government undertaking broader overhauls of the goods and services market, public administration, the pension system, and the healthcare system to regain competitiveness and create conditions for a sustainable economic model.

### Conclusion and programme outlook
- Cyprus demonstrates strong ownership and implementation of its programme; political commitment remains strong while efforts are made to maintain social cohesion.
- Indicators: numbers are "ahead of profile," market perceptions have improved, banks have been fully capitalized "under prudent assumptions," and authorities are addressing structural challenges.
- Financing: 2014 needs "are more than covered" as government builds deposits; the significant program buffer remains intact and is conservatively embedded in debt forecasts.
- Program buffer could cover additional fiscal needs "even under a severe growth shock."
- Authorities requested the Board’s approval of the completion of the third review and associated modifications of performance criteria.

*Source: _cr1492 - 2014. Moreover, wages in both the public and private sectors have been reduced*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1492.pdf_