## _cr15271 ## Source details **Canonical URL:** [_cr15271](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15271.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15271.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15271.pdf.json) --- ### EXECUTIVE SUMMARY - Cyprus continues to recover from the crisis; program performance remains generally strong. - All end-June and continuous performance criteria (PCs) were met. - Authorities have made good progress on a wide-ranging structural reform agenda, although some reforms encountered delays ahead of May 2016 legislative elections. - Renewal of reunification prospects following April 26th election of Mustafa Akinci could boost investment and trade if realized. - Completion of the review would make available SDR 99 million (about €126 million). - Total access under the arrangement is SDR 891 million (about 563 percent of quota, €1 billion). - The European Stability Mechanism has released €5.8 billion (of €9 billion committed); disbursement of an additional €500 million is expected in October. ### RECENT DEVELOPMENTS — REAL ECONOMY, LABOR, AND PRICES - Real GDP growth: - Growth turned positive in 2015:Q1 after almost four years of contraction. - 2015:Q2: 0.8 percent year-on-year (yoy); 0.5 percent quarter-on-quarter. - Growth in first half of 2015: 0.4 percent yoy. - Projected: 2015 = 0.5 percent; 2016 = 1.4 percent; 2017 = 2.0 percent; 2018 = 2.2 percent; 2019 = 2.1 percent; 2020 = 1.8 percent. - Sector performance: - Broad-based expansion in 2015:Q2 with positive growth in manufacturing and most services; construction continued to contract. - Tourism: - Tourist arrivals increased by 6½ percent yoy in the first seven months of 2015. - Loss from the Russian market (about 20 percent) more than offset by gains from other markets. - Tourism revenues declined by 6 percent yoy in the first half of 2015. - Labor market and inflation: - Unemployment: declined from peak of 16.9 percent (October 2013) to 16.3 percent in July; EU-standard unemployment rates: 2014 = 16.1; 2015 est. = 16.0; 2016 = 15.0; 2017 = 13.7. - Inflation: -2.4 percent yoy in July; HICP period average: 2014 = -0.3; 2015 est. = -1.0; 2016 = 0.9; 2017 = 1.3. ### FINANCIAL SECTOR DEVELOPMENTS - Capitalization and liquidity: - Average core tier 1 (CET1) ratio of locally active banks: 13.7 percent at end-March 2015 (13.9 percent at end-2014; 10.4 percent at end-2013). - Average common equity tier 1 capital level for the domestic bank stands at 14.3 percent (end-June 2015). - Liquidity buffers of domestically-owned banks at end-June were 4 percent (€0.2 billion) higher than at end-2014. - ELA funding in Bank of Cyprus (BoC) declined to €5.4 billion (about 31 percent of GDP) at end-August from €7.4 billion at end-2014. - Deposits and credit: - Deposits in core domestic banks increased by 3 percent in the first eight months of 2015. - Greek-owned subsidiaries’ total deposits represented about 13 percent of the domestic deposit market at end-July. - Deposits in Greek-owned subsidiaries declined earlier in 2015; outflows largely stopped following the Euro-summit agreement on Greece in July. - Banks provided €580 million new lending in the first five months of 2015. - After two years’ contraction, bank credit to the domestic non-financial private sector stabilized in July; credit to households continued to decline; credit to the corporate sector up for 7 consecutive months (0.7 percent yoy in July). - Profitability and provisioning: - Locally active banks registered €90 million profits before tax in the first quarter of 2015, compared to €48 million in the same period last year. - Cost-to-income ratio was stable while net interest income declined. ### NON-PERFORMING LOANS (NPLs) AND RESTRUCTURING PROGRESS - NPL stock and coverage: - NPL ratio in the core domestic banking system: 59 percent at end-April; provision coverage of NPLs: 36 percent. - NPL ratio (end-2014 definition change series): 2013 = 38.6; 2014 = 44.9; 2015:Q1 = 44.8 (source tables). - Restructuring progress (Box 1 highlights): - Stock of restructured loans increased from €1.3 billion to €4.9 billion year-on-year by end-2015:Q1. - Restructured loans amounted to 19 percent of nonperforming loans at end-2015:Q1. - Banks created centralized arrears management units and restructuring divisions; emphasis on preventing pre-arrears migrating into 90+ days past due and on restructuring loans past due for several months. - Preliminary signs: stabilization in loans 90+ days past due; increasing rate of implemented restructurings; more agreements based on long-term sustainable solutions instead of short-term forbearance. - Supervisory and legal measures: - Adoption of new foreclosure and insolvency frameworks expected to reduce foreclosure duration; banks began sending notification letters and pursuing foreclosures of commercial buildings and land rather than primary residences. - COM approved draft legislation to facilitate sale of loans to non-banks; adoption by Parliament expected by end-September 2015 (new SB). - Legal changes to enable securitization expected by end-December 2015 (new SB). ### PUBLIC DEBT, MARKET FINANCING, AND LIQUIDITY - Maturity and cost: - Average maturity of public debt rose to 8 years at end-June from 5 years at end-2012. - Average cost of public debt fell to 3 percent from 4 percent over the same period. - Market yields and ECB purchases: - Yield of the recently-issued 7-year benchmark Eurobond declined to 3½ percent in late August from 4 percent in April. - Average yield of 3-month treasury bills at auction declined to 1.9 percent from 2.7 percent. - Under the ECB’s bond-buying program, CBC purchased Cypriot bonds in the secondary market; volume purchased in July was €98 million; total volume of Cypriot debt eligible for purchase is estimated to be up to €0.5 billion. - Financing and buffers: - Program financing and cash position: projected needs through May 2016 = €2.3 billion covered by available government deposits of about €1.4 billion at end-June; expected proceeds €0.1 billion from coinage transfer; expected €0.1 billion central bank profits in 2016; undisbursed ESM/IMF funds. - Authorities intend to issue another Eurobond in the second half of 2015 to smooth maturities. ### OUTLOOK AND PROJECTIONS - Selected projections (percent change, unless otherwise indicated) — Years shown: 2014 2015 2016 2017 2018 2019 2020 - Real GDP: -2.3 0.5 1.4 2.0 2.2 2.1 1.8 - Consumption: -1.6 0.0 0.7 1.0 1.3 1.2 1.0 - Private consumption: 0.4 0.6 1.1 1.2 1.5 1.3 1.0 - Public consumption: -8.7 -2.3 -0.9 0.2 0.5 1.0 1.0 - Fixed investment: -18.8 0.2 3.6 4.0 4.5 4.2 3.6 - Inventory accumulation (contribution to growth): 2.7 0.0 0.0 0.0 0.0 0.0 0.0 - Foreign balance (contribution): -1.0 0.4 0.4 0.7 0.6 0.6 0.6 - HICP (period average): -0.3 -1.0 0.9 1.3 1.5 1.8 1.9 - Unemployment rate (EU standard; percent): 16.1 16.0 15.0 13.7 12.4 11.1 10.1 - Fiscal projections and indicators: - General government balance (percent of GDP): 2015 est. -1.3; 2016 = 0.1; 2017 = 0.9; 2018 = 1.7; 2019 = 1.7; 2020 = 1.7. - Primary fiscal balance (percent of GDP): 2015 = 1.3; 2016 = 2.4; 2017 = 3.0; 2018 = 3.6; 2019 = 3.6; 2020 = 3.6. - General government debt (percent of GDP) (baseline table): 2013 = 60.4; 2014 = 102.2; 2015 = 107.5; 2016 = 106.4; 2017 = 98.4; 2018 = 93.2; 2019 = 87.3; 2020 = 82.4; 2021 = 77.8; 2022 = 73.3. - External sector projections: - Current account balance (Millions of euros): 2015 est. -783; 2016 = -725; 2017 = -674; 2018 = -663; 2019 = -725; 2020 = -758; 2021 = -815. - Gross external financing requirements (Millions of euros): 2015 = 29,924; 2016 = 30,394; 2017 = 29,361; 2018 = 30,440; 2019 = 31,205; 2020 = 32,019. ### RISKS AND SCENARIOS - Domestic risks: - Slow progress in implementing the new private debt restructuring framework and addressing NPLs could delay balance sheet repair and credit expansion. - Persistently low inflation could further weigh on private sector balance sheets and public debt reduction efforts. - Domestic political situation could complicate passage of important reforms. - Upside domestic risks include stronger labor market improvement, higher consumer confidence, and faster private investment recovery. - Spillover risks from Greece: - Direct real and financial linkages reduced, but uncertainty in Greece could still affect Cyprus through lower external demand and higher funding costs. - Mitigating factor: reports that several Greek shipping firms are considering transferring part of their business to Cyprus. - Other external risks: - External debt below 300 percent of GDP at end-2014 (from a peak of 447 percent of GDP in 2010) remains sensitive to shocks. - Uncertain outlook for Russia. - Upside external risks: more robust external demand or greater compression of yields (e.g., due to ECB bond-buying). - Stress tests and public debt vulnerabilities: - Public debt baseline and stress tables presented; baseline nominal gross public debt: 2014 = 102.2; 2015 = 107.5 with projected decline to 73.3 by 2022 under baseline. - Bond spread example: 274 bp noted in heat-map risk indicators. ### POLICY PRIORITIES AND RECOMMENDATIONS - Financial sector / NPLs: - Resolve the high level of non-performing loans through effective implementation of the new private debt restructuring framework. - Continue strengthening internal NPL management (centralized arrears units, simplified restructuring processes, standardized solutions). - Implement and test foreclosure and insolvency reforms to increase clients’ willingness to cooperate and reduce foreclosure times. - Adopt supporting legislation to facilitate loan sales and securitization and enable swift transfers of title deeds. - Fiscal policy: - Maintain prudent public finances given the still-high public debt ratio. - Continue advancing structural reforms to support fiscal sustainability and promote growth and job creation. - 2015 cash primary balance: actual cash primary surplus through June = 0.3 percent of GDP; revised 2015 cash primary balance target = 1.3 percent of GDP. - Medium-term primary surplus targets: 2016 = 2.4 percent of GDP; 2017 = 3.0 percent of GDP; 2018 and beyond target a primary surplus between 3 and 4 percent of GDP. - Structural reforms and public administration: - Step up reforms to improve doing-business conditions: contract enforcement, insolvency resolution, credit registry expansion, Smart Regulation action plan, privatization acceleration (CyTA, Limassol port), public administration reform to control wage bill and enhance efficiency. - Strengthen tax administration: integrate tax authorities by end-June 2016; establish single registration process for all domestic taxes by end-September 2015; cleanse taxpayer register by end-December 2015. ### INSOLVENCY REFORMS (ANNEX I) - Reform package (passed April 18, 2015) comprised five laws: - Reform of the winding-up procedure in the Companies Act. - New corporate reorganization procedure (examinership). - Reform and modernization of the Bankruptcy Law for individuals. - Personal insolvency law introducing Personal Repayment Plan (PRP) and Debt Relief Order (DRO). - New regulation of insolvency practitioners (IPs) and creation of Insolvency Service (IS). - Personal Repayment Plan (PRP): - Scope: secured and unsecured debt may be restructured, including business-related debt. - Voting/confirmation: plan approved if creditors representing no more than 35 percent of voting debts vote against and no more than 50 percent of secured or unsecured creditors vote against; Court can impose a plan subject to conditions, including liquidation test and preservation of primary residence with market value no more than €300,000. - Debt Relief Order (DRO): - Relief for debtors with virtually no income and no assets; discharge of unsecured debts up to €25,000 following disclosure and court approval. - Institutional and operational measures: - Insolvency Service established; licenses granted to first group of IPs and first applications received. - Administrative acts and regulations for insolvency regime adopted (end-August 2015 structural benchmark met). - Planned actions: data collection to assess effectiveness, ongoing monitoring, licensing, court rules modernization, and adjustments as needed. ### COOPERATIVE SECTOR RESTRUCTURING AND AML/CFT - Cooperative sector: - Modified organizational structure of Cooperative Central Bank (CCB); amended affiliation directive in June to strengthen CCB oversight. - Commitment: by end-October 2015 submit time-bound action plan to centralize sector’s control functions; new financial control structure to be completed by March 2016. - External consultant to be retained by mid-October 2015 to assess sector structure. - AML/CFT: - CBC conducting onsite inspections under 2015 supervisory plan and new risk-based AML/CFT methodology. - CBC placed the local branch of FBME Bank Ltd. under resolution and will take actions following inspections and U.S. authorities’ ruling. - Registrar of Companies to strike off backlog of non-compliant companies by end-December 2015; reorganization beginning by end-March 2016. ### CONDITIONALITY, REPORTING, AND MONITORING - Program monitoring: - Policies monitored through quarterly PCs and reviews; structural benchmarks and TMU in place. - Quantitative performance criteria definitions and adjustments: - Program exchange rates for valuation: €1 = U.S. 1.1221 dollar; €1 = 134.90 Japanese yen; €1.25403 = 1 SDR. - Floor on GGPCB measured cumulatively from start of calendar year; definitions and specified adjustments detailed. - Ceilings on GGPE, stock of general government debt, accumulation of new government guarantees, external arrears, domestic arrears, and VAT refund arrears defined with specified stocks and limits (e.g., stock of government guarantees at end-December 2014 = €2.95 billion; stock of VAT refund arrears as of end-December 2014 = €117.3 million; VAT refund arrears shall not exceed 150 million euros). - Reporting requirements (selected): - Monthly detailed execution of revenues, expenditure and financing in EDP reporting format — provider: MOF — maximum time lag: 27 days after end of month (30 days for end-December). - Daily details for largest banks and coops on liquid assets, liquidity position — provider: CBC — maximum time lag: next working day. - Quarterly financial soundness indicators — provider: CBC — maximum time lag: 60 days after end of the month. ### STAFF APPRAISAL AND CONCLUSION - Staff appraisal: - Policies under the program continue to yield results: economic activity improving; fiscal adjustment ahead of schedule; liquidity normalizing; prospects for NPL resolution improving. - Road ahead remains challenging: domestic political challenges and external uncertainty (notably Greece) could test implementation. - Crucial to continue sound macroeconomic management and reform momentum; reforms in remaining program period are critical for sustained growth, fiscal and financial stability. - Conclusion highlights: - Banking sector liquidity improved though NPLs remain high and are a priority. - Structural reforms across goods and services markets, public administration, public financial management, housing, health, and energy are advancing but require continued focus. - Privatization efforts ongoing (CyTA, Limassol port) with targeted timelines. - With removal of domestic restrictions in April 2015, international debt markets reopened for Cyprus; authorities aim to return to durable market-based funding post-program. *IMF staff report excerpts from Country Report content unit _cr15271* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Background - Cyprus continues to recover from the crisis, and program performance remains generally strong. - Economic growth has turned positive; public finances continue to surprise on the upside. - Conditions in the core banking system have continued to normalize. - All end-June and continuous performance criteria (PCs) were met. - Authorities have made good progress on a wide-ranging structural reform agenda. - Domestic political conditions pose challenges to policy implementation; some reforms have encountered delays ahead of May 2016 legislative elections. - Renewed optimism over reunification prospects following the April 26th election of Mustafa Akinci as leader of the Turkish Cypriot Community could, if realized, boost investment and trade and benefit long-run economic growth. ### Recent developments — real economy, labor, and prices - Real GDP growth: - Growth turned positive in 2015:Q1 after almost four years of contraction. - 2015:Q2: 0.8 percent year-on-year (yoy); 0.5 percent quarter-on-quarter. - Growth in first half of 2015: 0.4 percent yoy. - Sector performance: - Broad-based expansion in 2015:Q2 with positive growth in manufacturing and most services; construction continued to contract. - Tourism: - Tourist arrivals increased by 6½ percent yoy in the first seven months of 2015. - Loss from the Russian market (about 20 percent) was more than offset by gains from other markets, such as the UK and Greece. - Tourism revenues declined by 6 percent yoy in the first half of 2015. - Labor market and inflation: - Unemployment: declined from peak of 16.9 percent (October 2013) to 16.3 percent in July. - Inflation: -2.4 percent yoy in July (the lowest rate since 1997), reflecting declining energy and tourism prices and weak economic conditions. - External sector: - In the first quarter, the external current account deficit narrowed compared to the same period last year, reflecting an improved income balance that more than offset a slight deterioration in the trade balance. ### Financial sector developments - Capitalization: - Average core tier 1 (CET1) ratio of locally active banks: 13.7 percent at end-March 2015, compared with 13.9 percent at end-2014 and 10.4 percent at end-2013. - Deposits: - Deposits in core domestic banks increased modestly in the first eight months of 2015. - Deposits in Greek-owned subsidiaries declined; Greek-owned subsidiaries’ total deposits represented about 13 percent of the domestic deposit market at end-July. - Deposit outflows from Greek-owned subsidiaries largely stopped following the Euro-summit agreement on Greece in July. - Liquidity: - Liquidity buffers of domestically-owned banks at end-June were 4 percent (€0.2 billion) higher than at end-2014. - ELA funding in the Bank of Cyprus (BoC) declined to €5.4 billion (about 31 percent of GDP) at end-August from €7.4 billion at end-2014, reflecting deposit inflows and government repayment of most of the Laiki bond (€750 million out of €1.1 billion) in June. - Credit developments: - After two years’ contraction, bank credit to the domestic non-financial private sector stabilized in July; credit to households continued to decline. - Credit to the corporate sector has been up for 7 consecutive months (0.7 percent yoy in July). - Banks provided €580 million new lending in the first five months of 2015. - Non-performing loans (NPLs): - NPL ratio in the core domestic banking system: 59 percent at end-April; provision coverage of NPLs: 36 percent. - New NPLs largely represent interest arrears on existing NPLs; currently performing loans have largely remained performing. - Pace of NPL restructurings accelerated in recent quarters with an increasing proportion of agreements based on long-term sustainable solutions instead of short-term forbearance. - Locally active banks registered €90 million profits before tax in the first quarter of 2015, compared to €48 million in the same period last year. - Profits were used to strengthen capital buffers; cost-to-income ratio was stable while net interest income declined. ### Progress on restructuring of nonperforming loans (Box 1 highlights) - Stock of restructured loans increased from €1.3 billion to €4.9 billion year-on-year by end-2015:Q1. - Restructured loans amounted to 19 percent of nonperforming loans at end-2015:Q1. - Banks have created centralized arrears management units and restructuring divisions, aided by call centers and centralized teams, focusing on (i) preventing pre-arrears migrating into 90+ days past due, and (ii) restructuring loans past due for several months. - Preliminary signs: stabilization in loans 90+ days past due; increasing rate of implemented restructurings in select banks. - Adoption of new foreclosure and insolvency frameworks expected to reduce foreclosure duration; banks have begun sending notification letters and pursuing foreclosures of commercial buildings and land rather than primary residences. ### Public debt and market financing - Maturity and cost: - Average maturity of public debt rose to 8 years at end-June from 5 years at end-2012. - Average cost of public debt fell to 3 percent from 4 percent over the same period. - Most of the Laiki bond was repaid using proceeds from a 7-year Eurobond issued in April and other liability management operations; composition shifted toward official financing sources. - Market yields: - Yield of the recently-issued 7-year benchmark Eurobond declined to 3½ percent in late August from 4 percent in April. - Average yield of 3-month treasury bills at auction declined to 1.9 percent from 2.7 percent. - Under the ECB’s bond-buying program, the Central Bank of Cyprus (CBC) purchased Cypriot bonds in the secondary market; volume purchased in July was €98 million; total volume of Cypriot debt eligible for purchase is estimated to be up to €0.5 billion. ### Outlook and projections - Real GDP growth: - Projected at 0.5 percent in 2015 (up from 0.2 percent at the time of the combined reviews). - Growth expected to pick up to 1.4 percent in 2016, and to remain at around 2 percent from 2017 onwards. - Projection incorporates a conservative restrained outlook for domestic demand and exports given continued regional volatility. - Unemployment and inflation: - Unemployment rate for 2015 revised down slightly in line with the upward growth revision. - Inflation revised down slightly to -1 percent for 2015, given outturn to date including larger-than-expected declines in prices charged by restaurants and hotels. - Inflation projected to turn positive in 2016 as the impact of lower oil prices subsides and domestic demand and wages gradually recover. ### Policy priorities and recommendations - Financial sector: - Resolve the high level of non-performing loans through effective implementation of the new private debt restructuring framework to consolidate financial stability and boost growth. - Continue strengthening internal NPL management (centralized arrears units, simplified restructuring processes, standardized solutions). - Implement and test foreclosure and insolvency reforms to increase clients’ willingness to cooperate and reduce foreclosure times. - Fiscal policy: - Maintain prudent public finances given the still-high public debt ratio. - Continue advancing structural reforms to support fiscal sustainability and promote growth and job creation. - Program and risks: - Risks to the program remain, though their impact would likely be manageable. - Domestic political situation remains a challenge to policy implementation. - Developments in Greece could affect Cyprus through the confidence channel despite reduced real and financial linkages. - Program financing and reviews: - Completion of the review would make available SDR 99 million (about €126 million). - Total access under the arrangement is SDR 891 million (about 563 percent of quota, €1 billion). - The European Stability Mechanism has released €5.8 billion (of €9 billion committed); disbursement of an additional €500 million is expected in October. *IMF Executive Summary, Cyprus — September 8, 2015* ### 9. The outlook is clouded by a high degree of uncertainty, including from the challenging ### _cr15271 - 9. The outlook is clouded by a high degree of uncertainty, including from the challenging ### Outlook and Risks - Domestic risks: - Slow progress in implementing the new private debt restructuring framework and addressing NPLs could delay balance sheet repair and credit expansion, holding back the recovery and constraining medium-term growth. - Persistently low inflation could further weigh on stressed private sector balance sheets and public sector debt reduction efforts. - The challenging political situation could complicate passage of important reforms, damaging confidence and growth. - Upside domestic risks: stronger improvement in the labor market, greater improvement of consumer confidence, and higher purchasing power through lower oil prices—each could boost private consumption. Private investment may recover more quickly than envisaged, contributing to faster-than-projected pickup of economic activity. - Spillover risks from Greece: - Direct real and financial linkages between Greece and Cyprus have been significantly reduced, and Cyprus has shown increasing resilience to developments in Greece. Nonetheless, ongoing uncertainty in Greece could still affect Cyprus through lower external demand and higher funding costs. - The impact on Cyprus would depend in part on the nature of the euro-area-wide policy response. - Mitigating factors: reports suggest several Greek shipping firms are considering transferring part of their business to Cyprus. - Other external risks: - Cyprus’s external debt, although below 300 percent of GDP at end-2014 (from a peak of 447 percent of GDP in 2010), remains sensitive to shocks, in particular to interest rates and growth. - The outlook for Russia represents a source of uncertainty for the Cypriot economy. - Upside external risks: more robust external demand or greater compression of yields (for example, due to positive impact of the ECB’s bond-buying program). - With the GDP projection for this year already incorporating some downside external risks, growth may surprise on the upside if these risks fail to materialize. ### Selected economic projections (Percent change, unless otherwise indicated) - Years shown: 2014 2015 2016 2017 2018 2019 2020 - Real GDP: -2.3 0.5 1.4 2.0 2.2 2.1 1.8 - Consumption: -1.6 0.0 0.7 1.0 1.3 1.2 1.0 - Private consumption: 0.4 0.6 1.1 1.2 1.5 1.3 1.0 - Public consumption: -8.7 -2.3 -0.9 0.2 0.5 1.0 1.0 - Fixed investment: -18.8 0.2 3.6 4.0 4.5 4.2 3.6 - Inventory accumulation (contribution to growth): 2.7 0.0 0.0 0.0 0.0 0.0 0.0 - Foreign balance (contribution): -1.0 0.4 0.4 0.7 0.6 0.6 0.6 - HICP (period average): -0.3 -1.0 0.9 1.3 1.5 1.8 1.9 - Unemployment rate (EU standard; percent): 16.1 16.0 15.0 13.7 12.4 11.1 10.1 - Sources: Eurostat, Central Bank of Cyprus, and IMF staff estimates. ### Policy discussions: priorities until end of program (early 2016) - Emphasis on: - Legal and supervisory measures to accelerate NPL workouts. - Fiscal policy in 2015 and the medium-term to ensure debt sustainability. - Structural reforms to support fiscal sustainability and promote growth. ### Financial Sector Policy — NPLs and private debt restructuring framework - Priority: addressing the high level of NPLs to restore credit and support growth—Cyprus has the highest NPL ratio in Europe. - Progress achieved: - New legal framework for private debt restructuring established and groundwork laid to accelerate NPL resolution. - Banks put in place large-scale internal workout units and policies in line with the Arrears Management Framework and the Code of Conduct. - Temporary tax relief for capital gains on property transactions in the context of debt restructuring and a temporary halving of property transfer fees expected to increase incentives for restructuring solutions. - Remaining needs: further efforts across several fronts to comprehensively tackle the NPL problem. Boxed findings (from Box 2 and Box 3 as presented) - Non-Financial Corporate (NFC) balance sheets and investment (Box 2 highlights): - NFC debt-to-GDP ratio: 300 percent as of end-2014. - NFC debt dynamics: despite a decline in nominal level, NFC debt-to-GDP ratio increased over 2013–14 due to real economic contraction and deflation. - Sector concentration: secondary sector more heavily indebted than tertiary sector. - Firm-level deterioration: corporate sales growth fell from 11 percent in 2008 to -11 percent in 2013; debt-to-sales ratio increased from 2.3 to 3.8 over the same period. - In 2013, about 39 percent of corporate debt was held by illiquid or insolvent firms, up from less than 6 percent in 2010. - Investment contraction: gross fixed capital formation fell by 60 percent over 2008–14; share in GDP from 27 percent in 2008 to 12 percent in 2014. - Corporate net investment rate: declined from 3 percent in 2008 to -10 percent in 2013. - Channels reducing investment: - Debt overhang: average earnings-to-debt ratio declined from 15 percent in 2010 to 9 percent in 2013. - Leverage: average debt-to-assets ratio of 57½ percent in 2013, down from 60½ percent in 2011. - Debt maturity: long-term debt accounted for 30 percent of total debt in 2013, up from 20 percent in 2005. - Empirical contribution: changes in debt overhang, leverage, and debt maturity contributed to 24 percent of the decline in corporate investment over 2008–13. - Regression results (Dep. variable: Net investment rate): - Earning to debt ratio: 0.15 (p-val 0.00) - Debt to assets ratio: -0.21 (p-val 0.00) - Long-term debt to debt ratio: 0.17 (p-val 0.00) - Sales growth: 0.34 (p-val 0.00) - ln(assets): 0.01 (p-val 0.00) - AR(1): z -2.36 (p-val 0.02) - AR(2): z 0.62 (p-val 0.54) - Hansen test: 52.96 (p-val 1.00) - Model: Dynamic GMM model with 2 lags of dependent variable. - Fiscal impact of recent tax and welfare revisions (Box 3 highlights): - Estimated fiscal cost of recent revisions: about 0.2 percent of GDP per year. - 50 percent reduction in property transfer fees: - Reduction applies to sales and mortgage registration between June 2015 and December 31, 2016. - Expected fiscal cost: 0.1 percent of GDP per year. - Amendments to capital gains taxation: - Exemptions to facilitate debt restructuring through May 6, 2017 and end-December 2017 as specified. - Temporary exemptions for properties purchased between July 2015 and end-December 2016. - Average capital gains tax from all activities was small—0.2 percent of GDP per year in 2013 and 2014. - Two revisions to business taxation: - Introduction of a notional interest deduction for equity financing of new investments. - Revision of the definition of non-domicile: exempts foreign individuals from taxation on interest, dividends, and rents for 17 years; both accompanied by anti-abuse clauses. - These provisions are not expected to have a material fiscal impact in 2015 and 2016. - Amendments to GMI legislation: - Slight expansion of eligibility criteria; fiscal impact expected to be less than 0.1 percent of GDP annually. - New mortgage subsidy scheme: - Subsidizes interest of mortgage loans for primary residences to support vulnerable households. - Administered by Land Development Corporation (LDC); funding from LDC’s own budget with no implication for general government finances. ### Implementation and supervisory measures for the new frameworks - Implementation steps: - Insolvency Service established; licenses granted to first group of insolvency practitioners who have begun receiving applications. - Administrative acts and regulations for the insolvency regime adopted (end-August 2015 structural benchmark—SB). - Court rules changed to facilitate foreclosure framework; to be reviewed by end-October to ensure facilitation of new insolvency procedures. - Authorities committed to adopt amendments to civil procedure and other laws by end-March 2016 to: - (i) limit interim applications and interlocutory measures that have caused delays; - (ii) increase availability of information on debtors’ financial situation. - Review and monitoring: - Comprehensive review of the private debt restructuring legal framework and preparation of an action plan by end-December 2015. - Council of Ministers (COM) to adopt any necessary adjustments by end-January 2016 (modified SB). - Original intention to submit proposed adjustments to COM by end-September revised to end-January 2016 to better incorporate input from initial experiences. - Title deeds: - Significant disconnect between economic and legal ownership due to transactions without transferring titles. - Temporary reduction of property transfer fees aims to mitigate incentives for non-transfer. - Legislation adopted to allow transfer of titles in “legacy cases” (transactions where buyers registered their contract by end-2014 and fully paid but titles were not transferred due to developer mortgage encumbrance). - COM to approve required legislation to address title transfers in new transactions by end-October 2015 (new SB). Note: the end-June 2015 SB on adoption of legislation to accelerate transfers of title deeds was only partially implemented because additional legislation was needed. ### Supervisory strengthening and bank restructuring tools - CBC supervisory improvements: - CBC has begun strengthening supervisory capacity on arrears management; IMF technical assistance to support this. - Need for more work on: - Loan restructuring reporting and targets: - CBC has set up a targeting framework and published aggregated results in early September (end-July 2015 SB). - Starting this July, rolling quarterly targets set for two quarters ahead with monthly reporting. - Projected performance of loan restructuring: - ECB CA assessed capitalization of Cypriot core banks last year based on assumptions on restructuring progress. - Given improved economic environment, adoption of insolvency and foreclosure legislation, and increasing restructurings, CBC will update system-wide projections on NPL management by end-September, focusing on cure rates, collateral values, and time to restructure or liquidate. These projections will inform supervisory priorities. - Enabling sale and securitization of loans: - COM approved draft legislation to facilitate sale of loans to non-banks; adoption by Parliament expected by end-September 2015 (new SB). - Work underway to establish legal framework for bundling loans and facilitating securitization; legal changes expected to be adopted by Parliament by end-December 2015 (new SB). - Banking regulation and supervision: - Continued efforts needed to strengthen regulation and supervision (MEFP ¶6). - CBC has hired additional staff to address critical needs, including transition to the SSM and the Single Resolution Mechanism (SRM; to be launched on January 1, 2016). - To ensure procedural requirements are proportionate to borrower and loan risk, the CBC will continue reforms (text truncated in source). *International Monetary Fund — CYPRUS, selected excerpts from Country Report content unit _cr15271* ### Box 4. NPLs, Institutions, and the Macroeconomic Environment ### Box 4. NPLs, Institutions, and the Macroeconomic Environment ### Institutional context and reforms under the program - Addressing the high level of NPLs is central to Cyprus’s adjustment program through: - Strengthening banks’ internal structures for arrears management. - Upgrading the legal framework for private debt restructuring. - World Bank Ease of Doing Business 2015 rankings for Cyprus: - Enforcing contracts: 113 out of 189 countries. - Resolving insolvency: 51st. - Enforcing contracts in Cyprus is characterized in the source text as taking a long time, requiring excessive procedures, and being financially costly. - Program measures and ongoing work cited: - Streamline loan origination directive by end-November. - Establishment of a centralized credit register with work underway to expand reach to non-banks and ultimately set up a credit scoring system. - Resolution authority appointed an external advisor for disposal of Laiki’s assets other than its stake in BoC; an advisor for sale of Laiki’s BoC stake to be appointed by end-October. - Starting in 2016, the European Single Resolution Board (SRB) will take over responsibility of resolving Laiki. ### Empirical evidence linking macroeconomics, institutions, and NPLs - Evidence from euro area countries for the period 2004–14 finds that: - The level of NPLs rises with higher unemployment. - The level of NPLs rises with higher private sector indebtedness. - The level of NPLs rises with declining house prices. - A composite legal institutions index shows a statistically significant relationship with the level of NPLs. - Regression results (Impact of Macroeconomic Variables and Legal Framework on NPLs): - Estimation methods shown: Fixed Effects, Difference GMM, System GMM. - Reported coefficients and significance: - Lagged NPL ratio: 0.94*** (Fixed Effects); 0.59*** (Difference GMM); 0.90*** (System GMM). - House prices: -0.035*** (Fixed Effects); -0.08*** (Difference GMM); -0.11*** (System GMM). - Private debt/GDP: 0.04*** (Fixed Effects); 0.04*** (Difference GMM); 0.01*** (System GMM). - Unemployment rate: 0.25*** (Fixed Effects); 0.52*** (Difference GMM); 0.18*** (System GMM). - Legal framework1/: 2.88** (Fixed Effects); 0.84*** (Difference GMM); 0.46*** (System GMM). - Constant: -6.53*** (Fixed Effects); -1.35*** (System GMM). - Goodness-of-fit / sample: - R2 (Fixed Effects): 0.88. - N: 150 (Fixed Effects); 140 (Difference GMM); 160 (System GMM). - Significance legend: * p<0.1; ** p<0.05; *** p<0.01. - Note on the legal framework indicator (footnote 1/): - The legal framework indicator is constructed as the z-scores of the average of the “Distance to the Frontier” with respect to enforcing contracts and resolving insolvency. - Similar results obtained with an index averaging different features under these categories. - For insolvency: time required to conclude it, costs as a percent of the estate, and the recovery rate. - For contract enforcement: time, cost as a percent of the claim, and number of procedures. - Interpretation: A lower value indicates stronger institutions. ### Policy implications and recommended implementation priorities - Strengthen legal and institutional frameworks to improve banks’ portfolio quality, complementing macroeconomic adjustments. - Key implementation priorities reflected in the program text: - Complete legal reforms to improve contract enforcement and insolvency resolution. - Implement internal bank improvements in arrears management. - Expand the centralized credit register to non-banks and develop a credit scoring system to improve lending decisions. - Ensure timely appointment of advisors and transition of resolution responsibilities (Laiki asset disposal; SRB takeover in 2016). - The empirical evidence supports strong implementation of these reforms because institutional quality and macroeconomic conditions are shown to materially affect NPL ratios. *Source: Box 4. NPLs, Institutions, and the Macroeconomic Environment, _cr15271 - Box 4. NPLs, Institutions, and the Macroeconomic Environment_* ### 28. Risks to program implementation remain, although there are some mitigating factors. ### _cr15271 - 28. Risks to program implementation remain, although there are some mitigating factors. ### Risks to program implementation - Downside risks center on those discussed in ¶9, notably: - domestic political opposition; - challenges related to getting NPLs down; - possible spillovers from Greece. - Mitigating factors: - the good track record of program implementation; - the authorities’ clear commitment to the measures under the program going forward; - recent pick-up in private debt restructuring signaling that efforts by the authorities and banks to tackle NPLs are starting to bear results; - authorities have a range of tools to address spillover risks from Greece and are monitoring the Greek-owned subsidiaries closely; - the broader financial system already has weathered well several rounds of tension with regard to the subsidiaries. ### Financing assurances and cash position - The program is expected to be fully financed through its expiration in May 2016. - Available financing and expected receipts covering projected needs through May 2016 (€2.3 billion): - available government deposits of about €1.4 billion at end-June; - expected proceeds of €0.1 billion from the transfer of the coinage function from the CBC to the Treasury at end-2015; - expected transfer of €0.1 billion of central bank profits to the government in 2016; - undisbursed funds from the ESM/IMF. - Market-conditional plan: - authorities intend to issue another Eurobond in the second half of 2015 to smooth maturities, minimize refinancing risk after the program, and ensure a comfortable cash buffer in line with the debt management strategy. ### Capacity to repay the Fund - Macroeconomic outlook and public finances are stronger than envisaged during the combined reviews, mitigating repayment risks. - Access to the capital markets, if sustained, would facilitate repayment to the Fund. - The Eurobond issuance in April resulted in a lower interest bill and a smoother repayment profile, reducing immediate post-program financing needs. - Debt service to the Fund relative to GDP and exports remains manageable. - The Fund’s peak exposure to Cyprus occurs in 2016 at 563 percent of quota or 6 percent of GDP. ### Staff appraisal — progress and remaining challenges - Policies implemented under the program continue to yield results: - Economic activity is improving, supported by both external and domestic demand. - Fiscal adjustment is advancing ahead of schedule. - Cyprus tapped the international bond market in April 2015, the second market issuance since the 2013 crisis. - Liquidity in the core banking system has continued to normalize. - Prospects for NPL resolution are improving. - The road ahead remains challenging: - Risks to the program are manageable and authorities’ ownership is strong, but domestic political challenges will continue to test policy implementation. - The external environment—in particular Greece—contributes to uncertainty. - It is crucial that the authorities continue with sound macroeconomic management and maintain the reform momentum. - Reforms to be introduced in the remaining program period are critical to ensure sustained growth, fiscal stability, and financial stability. ### Priority policy recommendations and actions - NPL resolution - Ensure significant improvement in dealing with NPLs to consolidate financial stability and boost growth. - Monitor implementation performance of the new private debt restructuring framework closely and address any deficiencies. - Continue supervisory work to ensure banks’ restructuring efforts succeed. - Adopt supporting legislation to facilitate loan sales and securitization and to enable swift transfers of title deeds to support balance sheet clean-up and reduce NPLs. - Financial regulation and supervision - CBC should continue to strengthen its supervisory capacity, in partnership with the SSM, and ensure a smooth transition to the SRM. - Expand credit information to allow for the creation of a credit scoring system. - Maintain close attention to Greek-owned subsidiaries and continue reforms of the coop sector. - Fiscal policy and public administration - Maintain Cyprus’s strong fiscal performance under the program and support it with ambitious structural reforms. - Continue prudent budget execution while ensuring support for growth-enhancing public spending and the social safety net. - Advance public administration reform to ensure an affordable wage bill and enhance government efficiency. - Sustain progress on managing government guarantees and reforming the revenue administration to minimize fiscal risks and broaden the tax base. - Growth-enhancing reforms - Step up efforts to support stronger growth to back fiscal and financial stability and improve living standards and employment prospects. - Overcome delays on the privatization program to raise investment and efficiency. - Move beyond diagnostic work on regulatory burden and implement concrete actions to improve the business environment. *Source: _cr15271 - 28. Risks to program implementation remain, although there are some mitigating factors.* ### 37. On the basis of the continued progress under the program and policy commitments ### On the basis of the continued progress under the program and policy commitments ### Program assessment and recommendation - Staff supports the completion of the eighth review and the proposed modifications of performance criteria. ### High-frequency indicators and real activity - Industrial production excluding construction: recent decline noted; series presented through Jun-15. - Electricity consumption: tracked through Jun-15. - Private consumption indicators: credit card transactions, vehicle registrations, and retail trade volume excluding autos show resilience; series through Jul-15. - Investment indicators: sales of cement, building permits, and property sales suggest that "Construction and real estate activity may have bottomed out." - Confidence and sentiment: "Confidence indicators and economic sentiment have rebounded recently." - Tourism: "Arrivals picked up again in July after a dip in June." - New company registrations: "have started to pick up." - Specific qualitative findings: "Industrial production has declined in recent months." "The resilience of private consumption has continued." ### Employment, wages, and inflation - Labor market: "The labor market remains weak. Unemployment is still high." - Unemployment rates tracked (total and youth) through Jul-15. - Compensation and unit-labor costs: - "Compensation of employees continues to adjust downward, but at a slower pace." - "Unit labor costs have declined more than those of other EA countries." - Inflation: - HICP remains negative and "Driven by lower oil and tourism prices, inflation remains negative... and lower than in most countries in the euro area." - HICP and core HICP series shown through Jul-15. - Sector contributions to employment growth shown through 2015Q1. ### External sector and external indicators - Current account and trade: - "Both imports and exports picked up this year, but mainly reflecting nonresident transit trade." - "The current account worsened last year, mainly on account of higher imports." - Current account balance and components tracked 2004–2014. - Net IIP: "the net IIP further deteriorated, reflecting mainly a decline in foreign assets." - Real effective exchange rate: "The real effective exchange rate has adjusted down to its longer-term average, and more so as measured by ULC." - Exports by destination: EU remains main destination; a "jump in trade with non-EU trading partners" observed. - Exports and imports of goods 3-month average y/y growth shown through Dec-14. ### Credit developments and monetary/financial conditions - Domestic credit growth (annual percentage change) tracked through Jul-15: - NFC, Households, Non-financial private sector total series presented. - Resident vs non-resident credit growth: "the contraction of credit to non-residents continued." - Loan and deposit rates: notable recent declines; series for deposit rates for NFC and households, and loan rates for households and NFC through Jul-15. - Bank credit: "Bank credit to the private sector has stabilized." - Credit demand and standards (percentage balance, projected): - "Credit demand is expected to increase... while credit standards are expected to be less tight." - Household and NFC loans and deposits (percent of GDP, residents) shown through Jul-15. - Household and corporate financial assets have "fallen more than liabilities." ### Banking sector developments - Customer deposits: "Total deposits have remained broadly stable." Indexed series (Dec 31, 2013 = 100) shown through Jul-2015. - Credit contraction in Cyprus in 2014–15 was "less than that experienced by its peers." - Emergency Liquidity Assistance to BoC: series in EUR billions through Jul-15; "ELA funding in BoC has declined considerably ... reducing dependence on central bank funding." - Central Bank funding in credit institutions liabilities: percent series through 2015:Mar. - NPLs and provisioning: - Notes on change in NPL definition at end-2014; March 2015 number estimated to retain continuity with old series. - Provisioning level adjustments: Dec 2014 had a €1.6 billion reduction in provisions of BOC on account of a netting adjustment on ex-Laiki portfolio; provisioning charts exclude this adjustment to retain continuity. - NPL ratio and provisioning level series shown: e.g., provisioning levels in Jun-13 through Mar-15 include values such as 55.2, 36.0, 6.3, 3.9, 3.2, 2.4, 1.5, 1.5, 0.5 (percent) across quarters. - "Growth of NPLs is slowing down and provision coverage has remained broadly unchanged ... accompanied by a pick up in the rate of restructuring (from very low levels)." - Evolution of restructured loans by counterparty (EUR billions) shown through Mar-15. ### External debt sustainability and stress tests - External debt (percent of GDP) baseline and scenarios shown; historical external debt peaked at 443 (2010 historical in a chart) and baseline projections include values such as 303, 344, 346, etc., across scenarios and years. - Debt-stabilizing non-interest current account and shock scenarios: - Combined shock, CA shock, growth shock, interest-rate shock scenarios presented with box averages (examples shown: baseline 303; combined shock figures such as 344, 346, 312, 333 in different charts). - Scenario labels note: "Individual shocks are permanent one-half standard deviation shocks." and combined shocks apply "Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance." - Public debt sustainability (baseline, realism, and stress tests): - Baseline table (As of August 07, 2015) includes: - Nominal gross public debt: 2013 = 60.4, 2014 = 102.2, 2015 = 107.5, 2016 = 106.4, 2017 = 98.4, 2018 = 93.2, 2019 = 87.3, 2020 = 82.4, 2021 = 77.8, 2022 = 73.3, cumulative value 69.2. - Public gross financing needs: 2013 = 12.4, 2014 = 17.4, 2015 = 16.0, 2016 = 12.8, 2017 = 6.1, 2018 = 3.6, 2019 = 4.9, 2020 = 12.2, 2021 = 10.7, 2022 = 5.8. - Real GDP growth (in percent): 2013 = 2.1, 2014 = -5.4, 2015 = -2.3, 2016 = 0.5, 2017 = 1.4, 2018 = 2.0, 2019 = 2.2, 2020 = 2.1, 2021 = 1.8, 2022 = 1.9. - Inflation (GDP deflator, in percent): 2013 = 2.7, 2014 = -1.4, 2015 = -1.2, 2016 = -0.9, 2017 = 0.7, 2018 = 1.2, 2019 = 1.4, 2020 = 1.7, 2021 = 1.8, 2022 = 1.5. - Effective interest rate (in percent): 2013 = 4.9, 2014 = 3.3, 2015 = 2.9, 2016 = 2.5, 2017 = 2.1, 2018 = 2.2, 2019 = 2.2, 2020 = 2.3, 2021 = 2.4, 2022 = 2.6. - Change in gross public sector debt (cumulative): 2013 = 1.8, 2014 = 22.7, 2015 = 5.3, 2016 = -1.1, 2017 = -8.0, 2018 = -5.1, 2019 = -6.0, 2020 = -4.9, 2021 = -4.6, 2022 = -4.5, cumulative -29.7. - Primary deficit (contribution): 2013 = 0.0, 2014 = 1.6, 2015 = -2.8, 2016 = -1.3, 2017 = -2.4, 2018 = -3.0, 2019 = -3.6, 2020 = -3.6, 2021 = -3.6, 2022 = -3.6, cumulative -17.5. - Primary (noninterest) revenue and grants (% of GDP): 2013 = 37.9, 2014 = 37.6, 2015 = 40.2, and projected path through 2022 with values such as 39.6, 39.1, etc. - Other identified debt-creating flows include net privatization/asset sales proceeds negative values and contingent liabilities zero in baseline. - Stress tests performed including: - Combined Macro-Fiscal Shock, Bank Contingent Liabilities Shock, Government Guarantee shock, Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Deflation Shock, Slower Recovery Shock. - Stress-test underlying assumption tables list specific paths for real GDP growth, inflation, primary balance, and effective interest rate across 2015–2022 for each shock (examples: Combined Shock primary balance path includes 1.3, -3.2, -8.2, 1.5, 2.6, 3.6, 3.6, 3.6; Real interest rate shock shows effective interest rate rising to 2.8, 3.5, 3.7 in some years). - Heat-map risk assessment indicators include bond spread (274 bp noted), external financing requirement percent of GDP benchmarks (12, 17, 25), change in share of short-term debt benchmarks (1, 1.5), and public debt held by non-residents benchmarks (30, 45 percent); country values shown (e.g., Public Debt Held by Non-Residents 49 percent in one figure). ### Fiscal developments in 2015 and projections - Fiscal balances and flows (ESA 2010, cash basis): - Primary and overall balance cumulative percent of GDP difference relative to previous year for January–June 2015 shows primary balance "is lower compared to the first half of 2014." - Revenues and expenditures: "The decline in total revenue reflects lower tax and other revenue..." - Composition of tax revenue (Jan–Jun 2015): shifts in direct taxes, indirect taxes, and social security contributions tracked with monthly balances. - Primary expenditure increased in H1 2015 reflecting "the payment of most of the remaining compensation to pension funds for bank restructuring (other current expenditure) offset by lower outlays in goods and services, wages and salaries, and social transfers." - Tax revenue composition: "shifting, reflecting improving consumption and employment and declining dividends and deposit interest bill." - Fiscal projections and indicators (Table 1 & 2 highlights): - Real GDP (percent): 2015 est. -2.3; projections 2016 = 0.5, 2017 = 1.4, 2018 = 2.0, 2019 = 2.2, 2020 = 2.1. - General government balance (percent of GDP): 2015 est. -1.3; projections 2016 = 0.1, 2017 = 0.9, 2018 = 1.7, 2019 = 1.7, 2020 = 1.7. - Primary fiscal balance (percent of GDP): 2015 = 1.3; projections 2016 = 2.4, 2017 = 3.0, 2018 = 3.6, 2019 = 3.6, 2020 = 3.6. - General government debt (percent of GDP): 2014 = 102.2, 2015 = 107.5, projections decline to 73.3 by 2022 per baseline table. - HICP period average: 2015 est. -1.0; projections 2016 = 0.9, 2017 = 1.3, 2018 = 1.5, 2019 = 1.8, 2020 = 1.9. - Unemployment rate (EU standard, percent): 2015 est. 16.0; projected decline to 10.1 by 2020. - Table 3 (Gross financing requirements and sources, 2013–17, Millions of euros): - Gross financing requirement including a buffer: 2013 May-Dec = 5,839.7; 2014 = 3,028.1; 2015 = 3,729.7; 2016 = 4,381.9; 2017 = 850.3. - Market financing (government): 2013 = 776.2; 2014 = 1,715.9; 2015 = 2,177.7; 2016 = 607.7; 2017 = 650.3. - Official financing sources: IMF disbursements and ESM amounts appear in staff estimates (e.g., IMF 252.8 in 2013; ESM 4,585.0 in 2013). - Net financing requirement: 2013 = 5,063.6; 2014 = 1,312.1; 2015 = 1,552.0; 2016 = 3,774.2; 2017 = 200.0. - Table 4 and 5: Balance of Payments and external financing requirements: - Current account balance (Millions of euros): 2015 est. -783; projected 2016 = -725, 2017 = -674, 2018 = -663, 2019 = -725, 2020 = -758, 2021 = -815. - Gross external financing requirements (Millions of euros): 2012 = 60,086; 2013 = 61,858; 2014 = 35,403; 2015 = 29,924; projections through 2020 with values such as 30,394, 29,361, 30,440, 31,205, 32,019. - Rollover rates: general government 2012 = 238%, 2013 = 0%, 2014 = 212%, 2015 = 425%, etc.; central bank rollover rates and private/bank rates provided. ### Monetary and financial aggregates - Aggregated MFI balance sheet (end of period, billions of euros) and monetary aggregates provided for 2010–20: - Assets: 2010 = 135.0; 2011 = 131.4; 2012 = 128.1; 2013 = 90.3; 2014 = 91.1; 2015 = 89.6; projections through 2020. - Claims on non-residents: 2010 = 69.3; 2011 = 61.3; 2012 = 55.9; 2013 = 25.3; 2014 = 25.6; 2015 = 26.5. - Deposits of Cypriot resident non-MFIs: 2010 = 45.4; 2011 = 43.7; 2012 = 43.3; 2013 = 33.0; 2014 = 32.3; 2015 = 32.1. - Money and credit: - Private sector credit excluding brass plates (annual percentage change): 2015 projection = -0.2 with levels shown across years. - Cypriot resident broad money (M2) annual percent change: 2015 = -0.2; levels across years reported (e.g., 2010 M2 = 244.2; 2015 = 195.3). ### Financial soundness indicators - Capital adequacy and asset quality (2010–2015:Q1): - Regulatory Capital ratio: 2010 = 12.4, 2011 = 12.1, 2012 = 7.3, 2013 = 14.0, 2014 = 15.4, 2015:Q1 = 15.5. - Non-performing loans to total gross loans (end 2014 definition change): 2010 = 5.8, 2011 = 10.0, 2012 = 18.4, 2013 = 38.6, 2014 = 44.9, 2015:Q1 = 44.8. - Provisions to nonperforming loans: 2010 = 2.6, 2011 = 4.2, 2012 = 7.1, 2013 = 11.4, 2014 = 14.0, 2015:Q1 = 14.4. - Return on assets and equity tracked: e.g., Return on assets 2015:Q1 = 0.8; Return on equity 2015:Q1 = 8.4. ### Conditionality and policy measures for the eighth review - Table of measures, timing, and status for the eighth review (selected entries): - Adoption by the Council of Ministers of legislation ensuring that the ownership of titles reflects economic ownership of the property at all times — End-June 2015 — Status: "Incomplete; legislation covers only legacy cases." - Adoption by the Council of Ministers of institutional arrangements to monitor and manage government guarantees — End-June 2015 — Status: "Implemented in September." - Publication by the CBC of targets of loan restructuring, and banks and coops' aggregate performance against them — End-July 2015 — Status: "Implemented in September." - Adoption of administrative acts and regulations needed to fully ensure the functioning of the insolvency regime — End-August 2015 — Status: "Met." ### Selected projections and summary indicators (Tables) - Table 1 key projections (selected): - Real GDP: 2015 est. -2.3; 2016 = 0.5; 2017 = 1.4; 2018 = 2.0; 2019 = 2.2; 2020 = 2.1. - HICP (period average): 2015 est. -1.0; 2016 = 0.9; 2017 = 1.3. - Unemployment rate: 2015 est. 16.0; 2016 = 15.0; 2017 = 13.7; 2018 = 12.4; 2019 = 11.1; 2020 = 10.1. - General government debt (percent of GDP): 2014 = 102.2; 2015 = 107.5; projected decline to 77.8 in 2021 and 73.3 in 2022 per baseline table. - Table 2 fiscal details (percent of GDP): - Revenue 2015 = 39.6; Expenditure 2015 = 40.9. - Tax revenue 2015 = 24.7; Indirect taxes 2015 = 14.6; Direct taxes 2015 = 9.8. - Interest payments 2015 = 2.7 (percent of GDP). - Table 5 external financing requirements and sources (Millions of euros): - Gross financing requirements: 2014 = 35,403; 2015 = 29,924; 2016 = 30,394; 2017 = 29,361. - Financing gap covered by program financing: ESM and IMF disbursements noted in staff estimates (e.g., ESM 4,585 in 2013; IMF 252.8 in 2013 in Table 3). *Source: IMF staff and official Cypriot authorities as presented in the IMF staff report figures, tables, and notes.* ### Annex I. The Insolvency Reforms in Cyprus ### Annex I. The Insolvency Reforms in Cyprus ### Background - At the onset of the 2013 crisis, Cyprus lacked a modern insolvency system; legislation was essentially unchanged since Cyprus’s independence in 1960 and reflected outdated English law. - Prior features: minimal use of insolvency procedures; bankruptcy of individuals punitive and restrictive; corporate insolvency focused on liquidation, not reorganization; only available collective restructuring tool outdated and limited to unsecured debt. - These features were key obstacles to private debt restructurings. ### The insolvency reform package (passed April 18, 2015) - Comprised of five laws covering companies and individuals: - A reform of the winding-up procedure in the Companies Act - A law introducing a new corporate reorganization procedure (examinership) for inclusion in the Companies Act - A reform and modernization of the Bankruptcy Law for individuals - A personal insolvency law introducing two new procedures: the Personal Repayment Plan (PRP) and the Debt Relief Order (DRO) - A law providing for a new regulation of insolvency practitioners (IPs) and for the creation of a new national insolvency regulator, the Insolvency Service (IS) ### The insolvency system in Cyprus after the 2015 reforms — Procedures and debtors - Companies: - Liquidation of the estate: Winding-up - Debt restructuring: Examinership - Individuals: - Liquidation of the estate: Bankruptcy - Debt restructuring: Personal Repayment Plan (PRP) - Debt relief: Debt Relief Order (DRO) ### Corporate insolvency regime (post-reform) - Provides for both liquidation and restructuring. - Liquidation: revamped and speedier winding-up procedure with changes in commencement criteria, governance, and sale modalities for encumbered assets. - Reorganization: introduction of examinership (modeled after Irish law): - Preserves viable companies by allowing design of a restructuring plan during a protected period. - Company management continues to run the business under supervision of an examiner. - Goal: reach an agreement with all creditors, both secured and unsecured, to preserve the enterprise. ### Personal insolvency regime — Two strands - Reforms to the old Bankruptcy Law: - Removed many punitive and restrictive elements. - Streamlined procedure allowing honest debtors to receive a discharge for their debts within three years from the start of the procedure. - New procedures under the personal insolvency law: - Personal Repayment Plan (PRP) - Debt Relief Order (DRO) ### Personal Repayment Plan (PRP) — key features - Based on the Irish Personal Insolvency Arrangement; targets debtors with a stable source of income. - Scope: - Secured and unsecured debt may be restructured, including business related debt. - Process: - Debtor initiates restructuring by applying to the IS. - IS appoints an IP to assist debtor in preparing a repayment plan. - Plan aims at maximizing repayment to creditors while allowing debtor reasonable living expenses determined in a uniform manner in accordance with guidelines issued by the IS. - Voting and confirmation thresholds: - Plan approved by creditors if creditors representing no more than 35 percent of the value of the voting debts vote against the plan and no more than 50 percent of the value of the secured or unsecured creditors vote against the plan. - Upon Court confirmation, an approved plan becomes binding on all creditors (cram down). - Court-imposed plan possibility: - Court can impose a plan where creditors do not accept proposals, provided minimum conditions are satisfied, including: - (i) Creditors cannot receive less under the plan than in a liquidation of the debtor’s estate (“liquidation test”) - (ii) The debtor will not lose ownership of his/her primary residence with a market value of no more than €300,000 - Other provisions: - Coordinated examinership/PRP for micro enterprises and their owners. - Specific provisions on the treatment of guarantors in the insolvency processes. ### Debt Relief Order (DRO) — key features - Based on UK and Irish procedures; offers relief to debtors with virtually no income and no assets. - Provides a discharge of unsecured debts up to €25,000 following extensive financial disclosure by the debtor and court approval. - Debt to public creditors can be included in the discharge with their consent. ### Safeguards for PRP and DRO - Requirements to ensure honest debtor behavior: - Debtor must submit a detailed financial statement and maintain ongoing obligations of disclosure. - IP scrutinizes debtor’s position and implementation of the plan. - IP may initiate modification of the plan if debtor’s circumstances change. - Debt relief can be revoked if the debtor does not comply with duties and obligations of the PRP process. ### Institutional framework and complementary measures - Introduction of qualifications for insolvency practitioners (IPs). - Creation of the Insolvency Service (IS) as a new supervisory authority to perform critical functions, centralize administration, appoint staff, and enable initiation of insolvency procedures. - Changes to the foreclosure regime to accelerate processes that could take years. - Introduction of a mediation procedure under the auspices of the financial Ombudsman to facilitate out-of-court consensual negotiations between banks and borrowers. ### Next steps and implementation priorities - Authorities aim to make the new insolvency regime fully operational and effective, with continuous review and adjustments as needed. - Planned actions: - Establish a data collection system to assess effectiveness of the reforms. - Licensing: first group of IPs have been licensed and first applications received. - Modernization: court rules and procedures being modernized to support smoother functioning. - Continuous monitoring of the new frameworks and adjustments where deficiencies are identified. *Source: Annex I. The Insolvency Reforms in Cyprus, IMF country documentation.* ### 4. We continue making progress with the restructuring of the coops sector. Building on ### _cr15271 - 4. We continue making progress with the restructuring of the coops sector. Building on ### Restructuring of the cooperative sector (coops) - Objective: strengthen sector capacity and speed up loan restructuring. - Governance - Modified organizational structure of the Cooperative Central Bank (CCB) to streamline division responsibilities and reflect regulatory obligations and the SSM’s views. - Amended the affiliation directive in June to strengthen CCB oversight over Cooperative Credit Institutions (CCIs). - Commitment: by end-October 2015 submit a time-bound action plan to centralize the sector’s control functions (risk, audit and compliance), subject to approval by the competent supervisor. - Financial control and risk processes - Since June, the CCB has embarked on a plan to strengthen financial control and reporting, including upgrading management information systems. - New structure of the financial control division, including upgraded staffing and capabilities, will be completed by March 2016. - External review of sector structure - Commitment: by mid-October 2015 retain an external consultant to identify necessary actions to enhance the sector’s shareholder value and prospects, including reviewing its structure. ### Maintaining adequate liquidity - Central Bank of Cyprus (CBC) actions - CBC continues to monitor conditions and stands ready to take measures following CBC and Eurosystem procedures and rules after full liberalization of deposits and external flows. - Additional government guarantees for issuance of bank bonds could be used as collateral against liquidity if necessary and in line with state aid rules, but only if needed to safeguard financial stability. ### Strengthening financial sector supervision - Transition to the SSM - Hired 10 additional staff to address CBC resource needs in supervision and resolution. - Commitment: by end-November 2015 streamline the directive on loan origination. - Expanding credit information - Will strengthen the credit registry by establishing a credit scoring system for banks and other creditors. - Commitment: by end-December 2015, drawing on external expertise, determine additional data needs. - Resolution of Laiki - Resolution Authority finalized a plan to complete Laiki’s resolution. - Appointed an investment advisor to manage sale of Laiki’s foreign assets. - Commitment: a second advisor will be appointed by end-October 2015 to manage disposal of Laiki’s stake in BoC. - Insurance and pension supervision - Continued commitment to reinforce supervision of insurance and pension funds. ### Strengthening the AML/CFT framework - AML/CFT supervision of banks - CBC conducting onsite inspections according to the 2015 supervisory plan and new risk-based AML/CFT supervision methodology. - CBC will streamline inspection procedures in 2015 to reduce time between visits, report finalization, and imposition of sanctions when appropriate. - CBC placed the local branch of FBME Bank Ltd. under resolution following correspondent bank measures after its designation by US authorities; CBC will take actions following July 2014 inspection, follow-up visits, and the final ruling issued by the U.S authorities in July 2015. - AML/CFT supervision of professions - Cyprus Securities and Exchange Commission to recruit additional qualified supervisors and conduct inspections per its yearly supervisory program. - CBA and ICPAC to continue providing training to their staff. - Registrar of Companies - Ongoing restructuring of the Department of the Registrar of Companies. - Commitment: by end-December 2015 strike off the registry the backlog of companies non-compliant with requirement to submit annual reports. - Reorganization to modernize operations in line with new law, with implementation beginning by end-March 2016. ### Fiscal policy outcomes and targets - Cash primary balance through June - Actual: cash primary surplus of 0.3 percent of GDP. - Target: a 0.4 percent of GDP deficit. - Drivers: buoyant VAT revenues, temporary factors (change in payment profile of airport royalties), and lower-than-expected unemployment and redundancy benefits. - 2015 cash primary balance target - Revised target: 1.3 percent (raised by 0.3 percent). - Rationale: lower unemployment and redundancy outlays, some revenue overperformance, and one-off non-tax revenue. - Policy stance: maintain prudence; let automatic stabilizers operate if activity weakens; any over-performance due to faster GDP growth would be saved. - Spending on the mortgage subsidy scheme will be contained and not increase overall expenditure outlays. - Reform of the immovable property tax combined with recent reduction of the property transfer fee will be fiscally neutral. - Monitor impact of 2015 tax law changes including the notional interest allowance for new equity and the defense tax exemption for non-domicile tax residents. - Medium-term fiscal targets - 2016 primary surplus target: 2.4 percent of GDP. - 2017 primary surplus target: 3 percent of GDP. - For 2018 and beyond: target a primary surplus between 3 and 4 percent of GDP. - Note: unchanged 2016 primary surplus reflects continued reduction in unemployment and redundancy benefits and a previously unprogrammed dividend from the telecom company (CyTA), offsetting revenue impact from EU VAT place of supply changes and contribution to the National Resolution Fund. ### Structural reforms and social policy - Welfare reform / Guaranteed Minimum Income (GMI) - By mid-October 2015 prepare plans to unify legislative and administrative framework for all disability benefits consistent with medium-term budgetary targets. - Plan to consolidate education benefits to be adopted by Parliament by end-October 2015. - Commitment: by end-September 2015 finalize an assessment report on GMI implementation covering main outcomes, number of applications, fiscal costs, targeting accuracy, and coverage; assessment to discuss possible refinements. - Commitment: by end-December 2015 build a registry of benefits in line with new welfare law, cross-checked with other databases. - Commitment: by end-March 2016, with the registry in place, re-examine overall welfare reform to realize efficiency gains. - Tax administration reform - Integration of two previous tax authorities into single Department of Taxation by end-June 2016; enhance tax collection. - Addressing assessment backlogs and tax arrears - Establish a project team by end-September (2015) to identify size and nature of unassessed tax returns and determine taxes and refunds due. - By end-October 2015 prepare an action plan to reduce the backlog. - Ongoing tax debt recovery plan implementation; first quarterly implementation report prepared in June (2015). - Reforming revenue administration - Appointed two assistant commissioners completing senior management team. - Commitment: establish a single registration process for all domestic taxes by end-September 2015. - Commitment: finalize cleansing of taxpayer register by end-December 2015. - LTO established in January will be fully functional by end-December 2015 including taxpayer services, risk assessment and compliance activities. - Commitment: establish integrated legal framework for tax procedures under a new tax procedures code to be approved by the Council of Ministers by end-December 2015. - Performance and Monitoring Unit to prepare monthly updates of performance indicators and a quarterly assessment report; first report by end-October 2015. - Consider possible changes to legal framework governing the criminal tax investigation unit to introduce judicial oversight. ### Fiscal risk management and public enterprises - Government guarantees and FRBSL implementation - Stock of government guarantees: about 20 percent of GDP. - Council of Ministers approved institutional framework to monitor and manage existing and new government guarantees (existing structural benchmark) in early September (2015). - Updated risk assessment report to be prepared by end-October 2015. - Public investment guidelines approved; Parliament to adopt FRBSL regulations and law regulating creation and functioning of SOEs by end-October 2015. - Privatization agenda - Received expressions of interest in concession of commercial activities of Limassol port; significant number of bidders pre-qualified and due diligence to start. - Regulatory framework of Cyprus Port Authority (CPA) to be amended and implemented by end-November 2015. - Concession agreement to be signed before end of the program. - Legislation to convert CyTA into a limited liability company to be adopted by Parliament by end-October 2015. - Committed to finalizing CyTA’s privatization by mid-2016. - Hired independent energy advisor in July to prepare a study for unbundling and ownership structure of Electricity Authority of Cyprus (EAC); any decision on EAC unbundling to be implemented by end-March 2016. ### Other structural measures to boost growth and public administration efficiency - Action Plan for Growth - Time-bound action plan to strengthen enforcement of contracts and streamline judicial procedures (timing to be developed). - By end-December 2015 Council of Ministers to adopt framework to attract strategic investments via fast-tracking administrative licensing procedures. - By end-September 2015 produce initial assessment of regulatory framework governing tourism; necessary legal amendments approved by Council of Ministers by end-March 2016. - Action plan to implement Smart Regulation to be adopted by Council of Ministers by end-October 2015. - Public administration reform - Early September 2015 Council of Ministers to approve a reform package including revision of wage setting framework and opening of promotion posts to broader civil service; package to be adopted by Parliament by end-December 2015 (existing structural benchmark). - Commitment: ensure general government compensation of employees as a share of GDP remains on a descending path over the medium term. - Reforms to enhance staff mobility for efficient human resource allocation. ### Program financing, monitoring and conditionality - Financing - Transfer of coins issuance rights and liabilities from CBC to MoF with additional financing of €100 million associated with this transfer by end-December 2015. - CBC expected to transfer an additional €100 million in central bank profits to the government during 2016. - Intention to issue additional debt in international markets before the end of the year to smooth maturities, minimize refinancing risk after the program, and ensure comfortable cash buffers, market conditions permitting. - Monitoring - Policies monitored through quarterly PCs and reviews; program includes performance criteria and structural benchmarks in Tables 1 and 2 and the TMU. - Continuous performance criteria include: non-accumulation of external payment arrears; non-imposition of restrictions on payments and transfers for current international transactions; non-introduction of multiple currency practices. - Quantitative conditionality excerpts (selected figures as presented) - Floor on the general government primary balance (cumulative since January): targets and actuals shown in table format in the source. - Ceiling on the general government primary expenditure: figures presented in the source’s table. - Ceiling on the stock of general government debt: figures presented in the source’s table. - Ceiling on the accumulation of new general government guarantees: figures presented in the source’s table. - Ceiling on the accumulation of external arrears: 0 0 0 0 (continuous performance criterion as shown). - Ceiling on the accumulation of domestic arrears: 0 -200. - Ceiling on the accumulation of tax refund arrears by the general government: 33 133 33 33 (as shown). - Structural benchmarks (selected timing commitments) - Parliamentary approval of reform package including a revision of the wage setting framework: End-December 2015 (existing structural benchmark). - Adoption by Parliament of legislation to enable sale of loans in line with CBC directives while retaining borrower protections: End-September 2015. - Approval by Council of Ministers of legislation for issuance and transfer of title deeds in non-legacy and new property transactions: End-October 2015. - Adoption by Parliament of legislation to remove impediments to securitization of assets: End-December 2015. - Adoption by Council of Ministers of necessary adjustments to insolvency and foreclosure frameworks, including legislative changes: End-January 2016 (modified SB). *Source: _cr15271 - 4. We continue making progress with the restructuring of the coops sector. Building on (IMF staff report excerpt).* ### 2. For program purposes, all foreign currency-related assets, liabilities, and flows will be ### _cr15271 - 2. For program purposes, all foreign currency-related assets, liabilities, and flows will be ### Exchange rates and valuation - For program purposes, all foreign currency-related assets, liabilities, and flows will be evaluated at “program exchange rates”; items affecting government fiscal balances will be measured at current exchange rates. - Program exchange rates: - €1 = U.S. 1.1221 dollar - €1 = 134.90 Japanese yen - €1.25403 = 1 SDR ### Reporting standards - The Ministry of Finance (MOF) and the Central Bank of Cyprus (CBC) will employ reporting standards and templates appropriate given the transmission of data covered by this TMU, unless otherwise stated or agreed with the EC, the ECB and the Fund. ### Quantitative Performance Criteria and Indicative Targets — General framework - General government coverage (for program purposes, according to ESA 2010 for EDP reporting): - Central government: Constitutional Powers, Constitutional Services, Independent services, Independent offices, Ministries and supervised departments/services/bodies, 21 special purpose funds, and 14 semi government organizations. - Local governments: 39 municipalities, 356 village authorities, and all agencies/institutions attached thereto classified as local governments. - Social security funds: medical treatment scheme, regular employees’ provident fund, social insurance fund, holiday fund, redundancy fund, protection of the rights of employees’ fund. - Any newly created institution defined as general government under ESA 2010; government will inform IMF, EC and ECB of creations or pending reclassifications immediately. - General government, as measured for program monitoring, shall not include entities re-classified from outside general government into general government during that year. ### Floor on the General Government Primary Cash Balance (GGPCB) — definitions and adjustments - Definitions: - GGPCB = General government cash balance (GGCB) − general government interest receipts + general government interest payments. - GGCB = total revenue (tax revenue, social security contributions, grants and other revenue) − total expenditure. - Payment of called guarantees recorded as cash expenditures. - Privatization receipts and proceeds from sale of land and buildings are excluded from revenue. - Privatization receipts defined as receipts from disposal to private owners by a government unit of the controlling equity of a public corporation or quasi-corporation. - Measurement: - The floor on the GGPCB in each year measured cumulatively from the start of that calendar year. - Adjustments to the 2015 targets: - Adjusted downwards by payments to compensate pension funds for losses related to the resolution of Laiki Bank up to €0.5 million. - Adjusted upwards by dividends received from the CBC in excess of €133 million and in excess of €58 million from the semi-government organizations. - Adjusted downwards by dividends received from the CBC below €133 million and below €58 million from the semi-government organizations. - Adjusted downwards by payments to cover called government guarantees up to €80 million. - Bank-support related transactions: - Floor on GGPCB will be adjusted downwards by payments related to bank support under the program’s banking sector support and restructuring strategy. - Transactions that may be excluded include loans to financial institutions and investments in equity of financial institutions (requited recapitalization); unrequited recapitalization and purchases of troubled assets. - Any central government financial operation to support banks, including issuance of guarantees or provision of liquidity, will be immediately reported to IMF, EC and ECB staff. ### Ceiling on General Government Primary Expenditure (GGPE) - GGPE includes compensation of employees, goods and services, subsidies, social benefits, other recurrent expenditure, and capital expenditure. - Adjustments: - Ceiling on GGPE will be adjusted upwards by payments related to bank support under the program’s banking sector support and restructuring strategy (same transaction types as above). - 2015 ceilings on GGPE will be adjusted upwards by payments to compensate pension funds for losses related to Laiki bank up to €0.5 million. - 2015 ceilings will be adjusted upwards by payments to cover called government guarantees up to €80 million. ### Ceiling on the stock of General Government Debt - Definition and measurement: - General government debt = total outstanding gross liabilities as defined by ESA 2010, includes debt of all institutions included in general government and other ESA 2010 adjustments. - Debt measured at nominal value. - Program exchange rate applies to all non-euro denominated debt. - Adjustments to the ceiling: - Upwards (downwards) by any upward (downward) revision to the stock of end-December 2014 general government debt. - Upwards (downwards) by any increase (decrease) to the disbursement of the Cyprus Entrepreneurship fund EIB loan, currently projected at €20 million for 2015. - 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, investments in equity, unrequited recapitalization, purchases of troubled assets); any central government financial operation to support banks will be immediately reported to IMF, EC and ECB staff. - Upwards by amounts disbursed under the EIB loan to finance projects authorized in the 2015 budget under the National Strategic Reference Framework. - Upwards by €600 million if the debt-to-asset swap between the government and the central bank is not finalized according to the current timeline. - Upwards by the size of the revision of the stock of general government debt due to methodological changes in the definition of the government sector. ### Ceiling on the Accumulation of new General Government Guarantees - Coverage: - Includes domestic and external guarantees granted during the test period and guarantees whose maturity is extended beyond initial contractual provisions. - Excludes guarantees 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 general government but within the non-financial public sector are not permitted to grant guarantees. - Stock and adjustments: - Stock of guarantees at end December 2014 was €2.95 billion. - Guarantees provided by the Central Agency of Equal Distribution of Burdens (newly added to general government) will not exceed €2 million. - Ceiling adjusted upwards for issuance of government guaranteed bonds to be used in monetary policy operations to boost BoC’s liquidity up to €2.9 billion. - Ceiling adjusted upwards (downwards) by any increase (decrease) of the disbursement of EIB and/or Council of Europe Development Fund loans to be guaranteed by the government in 2015 relative to amounts presented in Table 1 of the MEFP. ### Ceiling on the Accumulation of External Arrears (continuous performance criterion) - Definition: - External payment arrears = payments on debt to non-residents contracted or guaranteed by the general government, not made within seven days after falling due. - Stock: - The stock of external payment arrears as of end-December 2014 was €0. ### Ceiling on the Accumulation of Domestic Arrears (performance criterion) - Definition: - Domestic expenditure arrears = unpaid invoices past due date by 90 days by budgetary central government, extrabudgetary funds, semi-government organizations, and local governments excluding village communities. - If no due date specified, unpaid commitment is considered in arrears 90 days after initiation of the invoice. - Stock and tolerance: - Stock of domestic expenditure arrears as of end 2014 was €9.6 million. - Increases below €1 million will not be considered a breach of the performance criterion. ### Ceiling on the Accumulation of VAT Refund Arrears (performance criterion) - Definition: - VAT refund arrears = unpaid VAT refunds past the due date for payment established in tax legislation and/or corresponding regulations. - Stock and limit: - Stock of VAT refund arrears as of end-December 2014 was €117.3 million. - The stock of VAT refund arrears shall not exceed 150 million euros. ### Monitoring of Structural Benchmarks and MEFP Commitments - AML supervision’s implementation: - On a quarterly basis (in the context of program reviews), supervisory competent authorities will, on a confidential and anonymized basis, grant Fund staff access to supervisory assessments and information about enforcement actions applied for non-compliance and/or violations of laws and regulations. - CBC: in line with the 2015 annual inspection program, onsite supervision missions will start in the first quarter and step-up during the year. Total number and quarterly profile of inspections, and staffing objectives and levels, will be subject to periodic review by the CBC and the Fund. - Exchange of financial intelligence: - The Financial Intelligence Unit (FIU) will communicate to Fund staff, on a quarterly basis, detailed statistics on financial information exchanged with other FIUs, both upon request and spontaneously, with a breakdown by country. ### Reporting requirements — summary of Table 1 (selected items, frequencies, providers, maximum submission lags) - Detailed execution of revenues, expenditure and financing in EDP reporting format: - Frequency: Monthly - Provider: MOF. Budget Department/Cystat - Maximum time lag: 27 days after the end of the month, except end-December data 30 days after the end of the month - Debt Issuance, Amortization, and interest cost details by type of debt instrument: - Frequency: Monthly - Provider: MOF. Public Debt Management Unit - Maximum time lag: 27 days after the end of the month - Central Government Debt stock by type; interest bill details: - Frequency: Monthly - Provider: MOF. Public Debt Management Unit - Maximum time lag: 27 days after the end of the month - Budgetary Central Government deposits in Consolidated Fund and Banking System: - Frequency: Monthly - Provider: MOF. Public Debt Management Unit - Maximum time lag: 5 days after the end of the month - Stock of expenditure arrears and monthly flows by type: - Frequency: Monthly - Provider: MOF. Treasury Department - Maximum time lag: 15 days after the end of the month - Stock of VAT refund arrears: - Frequency: Quarterly - Provider: Tax Department - Maximum time lag: 15 days after the end of the quarter - Stock of government guarantees and monthly flows by institution: - Frequency: Quarterly - Provider: MOF Treasury Department - Maximum time lag: 27 days after the end of the month - Stock of external arrears: - Frequency: Monthly - Provider: MOF. Treasury Department - Maximum time lag: 15 days after the end of the month - Assets and liabilities of the central bank: - Frequency: Monthly - Provider: Central Bank of Cyprus - Maximum time lag: 30 days after the end of the month - Assets and liabilities of the domestic operations of the banking system (aggregate monetary balance sheet): - Frequency: Monthly - Provider: Central Bank of Cyprus - Maximum time lag: 30 days after the end of the month - Assets and liabilities of the banking system (consolidated, including foreign operations): - Frequency: Quarterly - Provider: Central Bank of Cyprus - Maximum time lag: 45 days after the end of the reporting period - Individual operational balance sheet of the domestic operations of the largest banks and coops (detailed information on deposits, funding, loans) 1/: - Frequency: Monthly - Provider: Central Bank of Cyprus - Maximum time lag: 30 days after the end of the month - Details for the largest banks and coops on liquid assets, liquidity position, other assets and liabilities 1/: - Frequency: Daily - Provider: Central Bank of Cyprus - Maximum time lag: Next working day - Deposits by institution, currency, residency and end-of-day liquidity buffers: - Frequency: Daily - Provider: Central Bank of Cyprus - Maximum time lag: Next working day - Financial soundness indicators—core set, deposits, NPLs, capital adequacy ratios: - Frequency: Quarterly - Provider: Central Bank of Cyprus - Maximum time lag: 60 days after the end of the month - 1/ Reporting requirements for cooperative. ### Statement by Mr. Menno Snel, Executive Director for Cyprus, and Mr. Serban Matei, Senior Advisor to the Executive Director (September 23, 2015) — key points and statistics - Program status: - Two reviews remaining; program underpinned by authorities’ firm commitment and broad social support. - Program bearing results and laying foundation for sustained growth and improved living standards. - Macroeconomic developments: - Economic recovery continued in 2015 after almost four years of recession; moderate expansion in Q2 2015 following positive growth in Q1 2015. - No appreciable spillovers to the real economy from events in Greece. - Sovereign debt yields have declined further, benefiting from purchases by the Euro system’s bond-buying program started in July. - Unemployment rate stabilized at around 16 percent over the first half of 2015. - Fiscal: - Fiscal performance exceeded expectations; all end-June and continuous performance criteria have been met. - For the first half of the year, the primary surplus stood at 0.7 percent of GDP, ahead of the program target. - Cyprus tapped international bond market in April 2015, the second market issuance since May 2011, totaling 1,750 million. - For 2015, authorities increased the primary balance target to 1.3 percent of GDP. - Authorities maintain a prudent stance given temporary factors and external environment uncertainty. - Public debt and contingent liabilities remain significant; improving public debt position is a priority. - Note: substantial program buffer will be used for liability management operation and will not lead to a debt increase (as expressed by the authorities). - Financial sector: - Authorities view program success as ultimately tied to financial sector revival. - Encouraging progress on roll-out of new private debt restructuring framework following adoption of insolvency and foreclosure regimes earlier in 2015. - Capitalization of core banks appropriate per ECB comprehensive assessment. - Average common equity tier 1 capital level for the domestic bank stands at 14.3 percent (end-June 2015). - After abolishing all capital controls in April 2015, deposits in core domestic banks increased by 3 percent in the first eight months of 2015, despite moderation of deposit rates. - Greek-owned subsidiaries experienced significant outflows from the beginning of 2015 to early July 2015; outflows largely stopped following the Euro-summit agreement on Greece in July. - Measured at end-June, liquidity buffers of domestically-owned banks have increased since end-... (text ends). *IMF staff report content as provided in the source PDF.* ### 2014. Those of foreign-owned locally active banks (mostly Greek-owned subsidiaries) were 30 ### Conclusion ### Banking sector liquidity and nonperforming loans (NPLs) - Those of foreign-owned locally active banks (mostly Greek-owned subsidiaries) were 30 percent (€1.2 billion) lower over the same period. - Notwithstanding this, substantial buffers remained at these banks even though in certain cases there was a breach of the regulatory liquidity requirements. - ELA funding in the Bank of Cyprus has further declined to €5.4 billion at end-August compared to €7.4 billion at end-2014. - Addressing the high level of NPLs in the banking system is a priority for the authorities. - Authorities’ approach to NPLs: encourage voluntary debt restructuring and increase the pace of durable solutions to expedite cleanup of private sector balance sheets and revive credit growth. ### Structural reforms (scope and intent) - Authorities continue to implement structural reforms across the whole economy to lay foundations for a more viable and sustainable growth model. - Areas of reform already advanced include: goods and services market, public administration, public financial management, housing market, health, and energy. - Attention is shifting towards remaining reforms to address longstanding inefficiencies that hampered growth, reduced productivity incentives, and fostered unjustified social imbalances. ### Fiscal risk management and governance - Authorities adopted a new government guarantee management framework to better manage fiscal risks, particularly those arising from guarantees (currently equivalent to about 20 percent of GDP). - The Council of Ministers has approved public investment guidelines. - Parliament will adopt pending regulations and the law regulating the functioning, oversight, and governance of the SOEs by end-October to ensure full implementation of the Fiscal Responsibility and Budget System Law. ### Public administration and wage bill control - To better control the growth of the public sector wage bill (after conclusion of the program) and increase public sector efficiency, significant public administration reform is underway. - Draft legislation on public wage increases, promotions, and mobility has been approved by the Council of Ministers and is expected to be adopted by Parliament by the end of this year. ### Privatization and state-owned enterprises - Special attention is given to privatization of state-owned enterprises; process is moving ahead despite some delays. - Council of Ministers approved legislation to corporatize the telecommunication company CyTA; transfer to private hands is envisaged to happen within a few months after the end of the program. - Bids for the commercial activities of the Limassol Port are due by the end of the year, with the goal to finalize the transaction in early 2016. ### Outlook and recent performance - Cyprus will continue much of the adjustment program, which for the previous two and a half years has yielded positive momentum. - Through decisive action to restore stability, the authorities continue to meet commitments to international partners despite strained capacity. - After almost four years of recession and embarkation upon a difficult adjustment program, the economy recorded positive growth as from the first half of 2015. - Latest indicators point towards continuous steady growth, rendering staff’s forecasts somewhat pessimistic. - Fiscal performance continues to exceed expectations; the financial system is now stable. - Absent all domestic restrictions as from April 2015, international debt markets have opened up a second time for Cyprus. - Authorities recognize significant challenges remain and will continue necessary reforms to ensure return to durable and sustainable market-based funding in a post-program setting. *IMF staff report excerpt* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15271.pdf_