## _cr1626 ## Source details **Canonical URL:** [_cr1626](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1626.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1626.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1626.pdf.json) --- ### Executive summary - Economic recovery has continued to gain strength while progress on the structural reform agenda has been modest. - All end-September performance criteria were met; implementation of structural benchmarks has suffered delays. - Program timing: - The program expires on May 14, 2016; this is the penultimate program review. - The ESM program ends on March 31, 2016. - Minority government faces parliamentary elections on May 22, 2016, with Parliament’s pre-election recess expected to start in mid-April. - Program financing: - Completion of this review would make available SDR 99 million (about €124 million). - Total access under the arrangement is SDR 891 million (about 563 percent of quota, €1 billion). - SDR 693 million (about €0.8 billion) has already been disbursed. - The European Stability Mechanism has released €6.3 billion (of €9 billion initially committed); an additional €275 million is expected in the first quarter of 2016. ### Recent developments (through September/late 2015) - Growth and labor market: - Real output expanded by 2.2 percent year-on-year (y-o-y; 0.4 percent quarter-on-quarter in Q3). - Growth during the first three quarters of 2015 was 1 percent, compared to 0.5 percent expected at the time of the eighth review. - Tourist arrivals increased by 7 percent (y-o-y) during June–October, with 90 percent of the increase coming from the UK market. - Construction grew for the first time in seven years. - Private consumption contributed 1.3 ppts to GDP growth. - The price level fell by 1.5 percent (y-o-y). - Unemployment fell from a peak of 16.9 percent in October 2013 to 15.1 percent in September. - Fiscal outcomes: - Primary cash surplus at 1.9 percent of GDP, 0.2 percentage points larger than programmed. - Overperformance largely due to lower-than-anticipated unemployment and redundancy benefit payments. - Public debt and markets: - Issuance of a 10-year €1 billion Eurobond in October. - 3-month treasury bill yields fell to 0.65 percent in November from about 2 percent in August. - Cypriot government Eurobonds amounting to €285 million purchased by the ECB as of November 30, 2015. - Banking sector: - Deposits in core domestic banks increased by 6 percent during the first 11 months of 2015. - Liquidity buffers at end-October about 10 percent (€0.9 billion) higher than at end-2014. - Bank of Cyprus emergency liquidity assistance at €3.8 billion (about 22 percent of GDP) as of mid-December, compared to €5.9 billion at end-June and a peak of €11.2 billion. - Banks provided €1.2 billion in new loans in the first 9 months of 2015. - NPLs in core banks at end-August about 60 percent of gross loans (150 percent of GDP); provision coverage of NPLs stood at 37 percent. - Cash collection rate across restructured NPLs 63 percent at end-September. - Total restructured fixed term loans €6.2 billion (25 percent of NPLs) at end-September, compared to €5.6 billion at end-June. - Average cure rate of restructured NPLs 80 percent at end-September compared to 76 percent at end-June. - Core tier 1 equity ratio at domestic banks 14.3 percent at end-June 2015 compared to 13.9 percent at end-December 2014. - Aggregate profits before tax for locally active banks €152 million in the first half of 2015, with return on assets and on CT1 equity of 0.5 and 4.7 percent, respectively. ### Outlook and macroeconomic projections - Framework updated to reflect favorable recent developments. - Growth forecasts: - Real GDP growth forecast for 2015 revised up to 1.4 percent. - Growth for 2016 expected at 1.5 percent. - Growth projection for 2017-20 average 2 percent. - Selected projections (Percent change, unless otherwise indicated): - Real GDP: 2014 -2.5, 2015 1.4, 2016 1.5, 2017 2.0, 2018 2.2, 2019 2.1, 2020 1.8 - Private consumption: 2014 0.6, 2015 1.3, 2016 1.3, 2017 1.4, 2018 1.5, 2019 1.2, 2020 1.0 - Fixed investment: 2014 -18.0, 2015 2.2, 2016 3.6, 2017 4.0, 2018 4.5, 2019 4.2, 2020 3.6 - HICP (period average): 2014 -0.3, 2015 -1.6, 2016 0.6, 2017 1.3, 2018 1.5, 2019 1.8, 2020 1.9 - Unemployment rate (EU standard; percent): 2014 16.1, 2015 15.5, 2016 14.5, 2017 13.2, 2018 11.9, 2019 10.6, 2020 9.6 - Risk assessment: - Domestic: political cycle risk may weaken reform resolve; slow workout of NPLs would impede credit and investment. - External: very high external debt projected at 574 percent of GDP at end-2015; continued uncertainty in Greece; outlook for Russia affects tourism and services; de-risking by foreign banks may weaken correspondent banking access. ### Financial sector policies — NPLs and restructuring framework - Policy imperative: accelerate reductions in NPLs to revive lending and boost growth. - Legal/institutional measures: - Law “On the Sale of Credit Facilities and Other Related Issues” adopted November 12, 2015 — applies to loans to individuals and micro- and small SMEs not exceeding €1 million; retains protections for small loans under the Code of Conduct; sets licensing, minimum capital requirement (€100,000), and CBC supervision requirements. - Draft law on asset securitization prepared; Parliamentary adoption envisaged by end-February (modified SB). - CBC operational measures: - CBC set quarterly bank-by-bank NPL restructuring targets since June and began publishing aggregate targets in September. - CBC identified supervisory priorities and will project future system-wide loan restructuring and recovery paths. - Banks’ performance (Q3 2015, end-September): - Restructured fixed term loans reached €6.2 billion (26 percent of NPLs) cumulative. - Successful restructurings (Indicator 3): Actual €2 billion, or 68.2 percent; Target 66.5 percent. - Early arrears management (Indicator 4): Actual 31.2 percent (€1.2 billion); Target 27.8 percent. - Proposed sustainable solutions: Actual €9.6 billion (6.3 percent of loans in arrears >90 days); Target 9.4 percent. - Concluded sustainable solutions: 6.5 percent; Target 7.5 percent. - Q4 targets revised up: proposed sustainable solutions from 11.5 percent to 12.5 percent; concluded sustainable solutions from 10.1 percent to 11.6 percent. - Operational priorities: - Implement foreclosure and insolvency regimes; strengthen arrears management supervision; facilitate banks’ disposal of distressed assets. - CBC to publish final results of a study on borrowers’ financial situation by end-January 2016 and deploy a borrower comparison tool on its website by end-January 2016. ### Cooperative sector restructuring and governance - Recent actions and targets: - Coops raised provisions by about €525 million (3 percent of GDP) in Q3 in response to SSM assessment. - Government provided €175 million (1 percent of GDP) in late December as additional public funds for coops. - Coops had a €1.5 billion (8.6 percent of GDP) recapitalization in 2014. - Box 1 highlights of coop plan: - Tier 1 capital ratio raised to 14 percent; provisioning coverage of 90-day past-due loans boosted to 50 percent after Q3 augmentations. - Centralization of NPL management, financial management and control, credit risk management, and audit at the CCB; CCIs retain customer-facing functions. - Privatization: initial listing on Cyprus Stock Exchange expected by 2017; by September 30, 2018, CCB to sell on the Exchange new shares equal to at least 25 percent of existing capital; Republic of Cyprus stake expected to fall to 25 percent or less at end of process. - Operational milestones: by end-January 2016, CCB to review NPL portfolio; by end-February 2016, establish a single contact center; financial control division restructuring completed by end-March 2016; risk function action plan completed by June 2016. - Remaining challenges: need stronger central functions (finance, risk, compliance, audit), staffing, and capacity. ### SSM capital review and recapitalization - SSM assessment finalized in December using end-2014 data; identified provisioning shortfalls in the coops; staff not granted access to data to review SSM assessment. - Capital needs sensitive to assumptions on house prices, cure rates, and time to restructure or liquidate. - Coops agreed updated restructuring plan with DG COMP aiming at long-term viability without future public funds. ### Central Bank of Cyprus (CBC) governance, supervision, and AML/CFT - CBC reforms: - CBC implemented most safeguards recommendations but outstanding items remain: governance reforms, improved financial statement disclosures, strengthened legal compliance function. - CBC undertaking governance review and comprehensive reorganization. - Supervision: - Supervision of core Cypriot banks under SSM with joint supervisory teams of ECB and CBC. - CBC set up a central unit to coordinate NPL issues; to intensify engagement with banks (monitoring metrics, drivers of restructuring, on-site visits). - AML/CFT: - CBC finalizing inspections of 13 financial institutions under the 2015 program and designing 2016 program. - CBC fined a local branch of a foreign bank for AML/CFT failures stemming from a 2014 inspection; other sanctions outstanding. - Need to reduce time lag between on-site inspections, report finalization, and imposition of sanctions. - Cyprus rated largely compliant by the Global Forum and committed to begin automatic exchange of information during 2017. ### Fiscal policy, public debt, and medium-term targets - Short-term outcomes and revisions: - 2015 cash-based projection for primary surplus revised to 1.5 percent of GDP from 1.3 percent (excluding €175 million coop recapitalization). - 2016 projection revised up by 0.1 percent of GDP to 2.5 percent of GDP. - Previously-agreed 2017–18 primary surplus targets: 3 percent and 3–4 percent of GDP, respectively. - Medium-term aim: reduce public debt from 109 percent of GDP in 2015 to around 70 percent of GDP by 2022; maintaining a primary surplus of about 3.5 percent of GDP beyond 2017 required. - Debt-to-asset swap with the CBC currently expected to yield 3.4 percent of GDP; privatization transactions expected to yield around 6 percent of GDP (2 percent less than previously expected due to removal of EAC from privatization list). - Selected general government account figures (Percent of GDP — selected table entries): - Revenue: 39.6, 39.5, 39.1, 38.8 - Expenditure: 40.9, 41.1, 38.9, 38.8 - Capital Expenditure: 3.2, 3.4, 3.2, 3.1 - General Government balance: -1.3, -1.5, 0.1, 0.0 - General Government primary balance: 1.3, 1.5, 2.4, 2.5 - Fiscal financing buffers: - Government deposits about €1.5 billion at end-November. - Transfer of coin-minting to Treasury expected to yield about €0.1 billion in early-2016. - CBC profits expected to yield €0.1 billion in 2016. - Expected ESM/IMF disbursement of €0.4 billion under the current review covers projected financing needs through May 2016 (€0.6 billion), even if final tranches not disbursed. - Fund exposure upon completion of final review would peak in 2016 at 563 percent of quota or 6 percent of GDP. ### Structural reforms: status and priorities - Key delays and expected timing (modified structural benchmarks): - Approval by the Council of Ministers of legislation for issuance and transfer of title deeds in non-legacy and new property transactions — End-January 2016. - Parliamentary approval of a public administration reform package including a revision of the wage setting framework for the general government — End-February 2016. - Adoption by Parliament of legislation to remove existing impediments to the securitization of assets — End-February 2016. - Adoption by the Council of Ministers of adjustments to insolvency and foreclosure frameworks — End-February 2016. - Revenue administration: - Unique taxpayer number allocated; first quarterly performance report prepared. - Delays in strengthening the large taxpayer office, establishing integrated tax procedures legal framework, and identifying tax assessment backlogs (collectible arrears with no actions 1.2 percent of GDP at end-June 2015). - Staff advised adequately resourcing the integrated tax department and targeting arrears collection to largest debtors using enforcement tools (e.g., garnishment). - Public financial management: - Secondary legislation of the Fiscal Responsibility and Budget System Law expected end-January. - Law regulating creation and functioning of SOEs not expected before end-March. - Privatization and growth strategy: - Limassol port commercial activities privatization expected finalized by end-April. - CyTA privatization delayed; corporatization and employment bills expected by end-January to pave way for expressions of interest. - Action plan to reduce red tape and simplify licensing; tourism legal amendments expected to be approved by Council of Ministers in March 2016. ### Program conditionality, monitoring, and TMU highlights - Quantitative conditionality: - All end-September 2015 performance criteria and continuous PCs were met. - End-December quantitative PCs require waiver of applicability; staff expects they have been met though final data available after January 30. - TMU program exchange rates: - €1 = U.S. 1.1221 dollar - €1 = 134.90 Japanese yen - €1.25403 = 1 SDR - Selected quantitative PC figures (Millions of euros, Dec-15 target / Adjusted target / Actual): - Floor on the general government primary balance 3/: 300 / 323 / 232 - Ceiling on the general government primary expenditure 3/: 4,659 / 4,598 / 6,660 - Ceiling on the stock of general government debt 5/: 19,269 / 19,249 / 19,114 / 18,532 - Ceiling on accumulation of new general government guarantees 3/6/: 935 / 554 / 133 - Ceiling on the accumulation of external arrears 3/: 4,000 / 0 / 0 - Ceiling on the accumulation of tax refund arrears by the general government 3/: 33 / 33 / 3 - Reporting requirements (select): - Detailed monthly revenue, expenditure and financing in EDP reporting format — MOF — maximum time lag 27 days after the end of the month (end-December data 30 days). - Budgetary Central Government deposits in the Consolidated Fund and in the Banking System — MOF — maximum time lag 5 days after the end of the month. - Assets and liabilities of the central bank — Central Bank of Cyprus — monthly, maximum time lag 30 days. - Daily details for largest banks and coops on liquid assets and end-of-day liquidity buffers — Central Bank of Cyprus — next working day. - Monitoring of structural benchmarks: - CBC, MOF and other authorities to provide periodic updates and follow timelines noted in Table 2 (selected structural benchmarks listed above). ### Staff appraisal and policy priorities - Positive: economic activity strengthening; unemployment moderating; fiscal outturns ahead of projections; NPLs stabilized with increased sustainable restructuring; bank liquidity improving; successful sovereign issuance in October. - Main priorities and recommendations: - Lock in fiscal gains given still-high public debt. - Accelerate reduction of NPLs via: expanding legal instruments for banks, stepping up implementation of private debt restructuring framework, facilitating securitization and loan sales, effective insolvency and foreclosure implementation. - Avoid further delays in structural reforms (public administration, revenue administration, SOE law) to sustain growth and employment. - Strengthen CBC governance, disclosures, legal compliance, and supervisory engagement within the SSM framework. - Implement coop restructuring plan effectively, centralize key control functions, and proceed with privatization milestones. *International Monetary Fund — EXECUTIVE SUMMARY (Mission discussions in Nicosia, November 3–13, 2015; document dated January 11, 2016)* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Background and program status - Economic recovery has continued to gain strength even as progress on the structural reform agenda has been modest. - Economic activity through September continued to exceed expectations; fiscal outturns are running ahead of projections; non-performing loans have stabilized; and bank deposits are rising. - All end-September performance criteria were met; however, implementation of the structural reform agenda has suffered delays. - The program expires on May 14, 2016; this is the penultimate program review. The ESM program ends on March 31, 2016. - The minority government faces parliamentary elections on May 22, 2016, with Parliament’s pre-election recess expected to start in mid-April. ### Recent developments (through September/late 2015) - Growth and labor market: - Real output expanded by 2.2 percent year-on-year (y-o-y; 0.4 percent quarter-on-quarter in Q3). - Growth during the first three quarters of 2015 was 1 percent, compared to 0.5 percent expected at the time of the eighth review. - Tourist arrivals increased by 7 percent (y-o-y) during June–October, with 90 percent of the increase coming from the UK market. - Construction grew for the first time in seven years. - Private consumption contributed 1.3 ppts to GDP growth. - The price level fell by 1.5 percent (y-o-y). - Unemployment fell from a peak of 16.9 percent in October 2013 to 15.1 percent in September. - Fiscal outcomes: - At 1.9 percent of GDP, the primary cash surplus was 0.2 percentage points larger than programmed. - Overperformance was largely due to lower-than-anticipated unemployment and redundancy benefit payments. - Public debt and markets: - Cypriot sovereign debt received a series of upgrades by credit rating agencies, facilitating issuance of a 10-year €1 billion Eurobond in October. - Secondary market yields on long-term bonds moderated; 3-month treasury bill yields fell to 0.65 percent in November from about 2 percent in August. - Cypriot government Eurobonds in the amount of €285 million have been purchased by the ECB as of November 30, 2015. - Banking sector: - Aggregate bank deposits were stable from end-2014 to mid-2015, and have risen in recent months; deposits in core domestic banks (Bank of Cyprus (BoC), Hellenic Bank, and the Coops) increased by 6 percent during the first 11 months of 2015. - Liquidity buffers of domestic banks at end-October were about 10 percent (€0.9 billion) higher than at end-2014. - BoC reduced its reliance on emergency liquidity assistance to €3.8 billion (about 22 percent of GDP) as of mid-December, compared to €5.9 billion at end-June and a peak of €11.2 billion. - Aggregate stock of bank credit to the domestic nonfinancial private sector has been broadly stable since July 2015. - Banks provided €1.2 billion in new loans in the first 9 months of 2015. - NPLs in the core banks at end-August were about 60 percent of gross loans (150 percent of GDP); provision coverage of NPLs stood at 37 percent. - Cash collection rate across restructured NPLs was 63 percent at end-September. - Total restructured fixed term loans amounted to €6.2 billion (25 percent of NPLs) at end-September, compared to €5.6 billion at end-June. - Average cure rate of restructured NPLs improved to 80 percent at end-September compared to 76 percent at end-June. - Core tier 1 equity ratio at domestic banks reached 14.3 percent at end-June 2015 compared to 13.9 percent at end-December 2014. - Aggregate profits before tax for locally active banks were €152 million in the first half of 2015, with return on assets and on CT1 equity of 0.5 and 4.7 percent, respectively. ### Outlook and macroeconomic projections - The macroeconomic framework has been modified to reflect favorable recent developments. - Growth forecasts: - Real GDP growth forecast for 2015 revised up to 1.4 percent. - Growth for 2016 expected to increase modestly to 1.5 percent. - Risks to the outlook: - Political cycle risk: recent positive indicators, together with approaching parliamentary elections, could weaken resolve to pursue pending sensitive reforms. - External risks: uncertainties in the regional and global outlook could adversely affect tourism, business services, confidence, and ease of access to market financing. - Upside risks also exist. ### Policy discussions and priorities - Main emphasis: accelerate reductions in non-performing loans (NPLs) to revive lending and boost growth. - Measures discussed include expanding the range of legal instruments available to banks and stepping up implementation of the new private debt restructuring framework. - Fiscal policy: need to lock in fiscal gains given still-high public debt. - Structural reforms: avoid further delays in implementing structural reforms that are essential to sustainably re-invigorate growth and create employment. - Implementation status of selected measures (timing/status as reported): - Adoption by Parliament of legislation to allow the sale of loans, which retains the protections of borrowers offered under the Code of Conduct: End-September 2015 — Implemented in November. - Approval by the Council of Ministers of legislation for the issuance and transfer of title deeds in non-legacy and new property transactions: End-October 2015 — Not met. Expected for end-January 2016. - Parliamentary approval of a public administration reform package including a revision of the wage setting framework for the general government: End-December 2015 — Not met. Expected for end-February 2016. - Adoption by Parliament of legislation to remove existing impediments to the securitization of assets: End-December 2015 — Not met. Expected for end-February 2016. ### Program financing, disbursements, and approvals - Completion of this review would make available SDR 99 million (about €124 million). - Total access under the arrangement is SDR 891 million (about 563 percent of quota, €1 billion). - SDR 693 million (about €0.8 billion) has already been disbursed. - The European Stability Mechanism has released €6.3 billion (of €9 billion initially committed), and disbursement of an additional €275 million is expected in the first quarter of 2016. ### Mission, approvals, and timelines - Discussions took place in Nicosia during November 3–13, 2015. - All end-September quantitative and continuous performance criteria (PCs) were met, though delays were experienced in meeting all structural benchmarks (SBs). - To some extent, delays reflect authorities’ focus during late 2015 on steps to comply with unanticipated banking sector measures, and the technical complexity of several reforms. *International Monetary Fund — EXECUTIVE SUMMARY (Mission discussions in Nicosia, November 3–13, 2015; document dated January 11, 2016)* ### 1.4 percent) reflecting the expected slow normalization of the banking sector and high levels of ### _cr1626 - 1.4 percent) reflecting the expected slow normalization of the banking sector and high levels of ### Growth outlook and projections - Growth projection: During 2017-20, growth is projected to average 2 percent, supported by strengthening external demand and some further recovery in investment. - Investment contribution: Growth contribution of investment is expected to remain low reflecting its post-crisis collapse. - Unemployment and inflation revisions: - Unemployment rate for 2015 revised down to 15.5 percent, with continued gradual decline expected in subsequent years. - Inflation revised down to -1.6 percent for 2015; inflation is projected to turn positive in 2016 but to a slightly lower level than previously forecast due to the further downward revision in world oil prices. - Selected economic indicator projections (Percent change, unless otherwise indicated): - Real GDP: 2014 -2.5, 2015 1.4, 2016 1.5, 2017 2.0, 2018 2.2, 2019 2.1, 2020 1.8 - Consumption: 2014 -1.5, 2015 0.7, 2016 0.9, 2017 1.1, 2018 1.3, 2019 1.2, 2020 0.9 - Private consumption: 2014 0.6, 2015 1.3, 2016 1.3, 2017 1.4, 2018 1.5, 2019 1.2, 2020 1.0 - Public consumption: 2014 -9.0, 2015 -2.1, 2016 -0.9, 2017 0.2, 2018 0.5, 2019 0.9, 2020 0.9 - Fixed investment: 2014 -18.0, 2015 2.2, 2016 3.6, 2017 4.0, 2018 4.5, 2019 4.2, 2020 3.6 - Inventory accumulation (contribution to growth): 2014 2.9, 2015 0.0, 2016 0.0, 2017 0.0, 2018 0.0, 2019 0.0, 2020 0.0 - Foreign balance (contribution): 2014 -1.5, 2015 0.5, 2016 0.3, 2017 0.5, 2018 0.5, 2019 0.6, 2020 0.6 - HICP (period average): 2014 -0.3, 2015 -1.6, 2016 0.6, 2017 1.3, 2018 1.5, 2019 1.8, 2020 1.9 - Unemployment rate (EU standard; percent): 2014 16.1, 2015 15.5, 2016 14.5, 2017 13.2, 2018 11.9, 2019 10.6, 2020 9.6 - Sources for projections: Eurostat, Central Bank of Cyprus, and IMF staff estimates. ### Risks to the outlook - Two-sided risk assessment: - Domestic risks: - Upside: Continued positive surprises on consumption and employment could boost near-term growth. - Downside: Stronger-than-expected recovery together with upcoming elections could reduce perceived urgency for reform, precluding important reforms and damaging longer-term confidence and growth. - Slow workout of NPLs would impede new credit flows, hold back investment, and constrain medium-term growth. - External risks: - Very high external debt projected at 574 percent of GDP at end-2015, down from a peak of 727 percent of GDP in 2009, renders Cyprus sensitive to external interest rate and growth shocks. - Continued uncertainty in Greece may affect Cyprus via confidence effects and external financing costs; positive spillovers are also possible if Greek business activities migrate to Cyprus. - The economic outlook for Russia will impact tourism and business services revenue. - Continued de-risking by foreign banks may weaken correspondent banking access, affecting sectors relying on dollar-denominated settlements (e.g., shipping). ### Financial sector policies — NPLs and debt restructuring framework - Rationale: Addressing banks’ high NPLs remains essential to revive lending and raise economic growth prospects. - Legal and institutional progress: - A law adopted in November allows banks to sell individual loans or segments while preserving safeguards for small borrowers under the Code of Conduct (end-September SB). - A draft law on asset securitization has been prepared to facilitate bank deleveraging and unlock funding, but finalization delayed; Parliamentary adoption envisaged by end-February (modified SB). - Bank operational measures: - Banks have set up internal loan restructuring operations and are refining policies and practices. - CBC has set quarterly bank-by-bank NPL restructuring targets since June and began publishing aggregate targets in September. - Preliminary end-September results: banks in aggregate did not meet targets, but pace of restructuring increased, greater use of long-term restructuring agreements, and re-default rates were satisfactorily low. - CBC identified supervisory priorities and bank-specific actions and will project future system-wide loan restructuring and recovery paths. - Borrower financial situation: - Anecdotal evidence indicates a nontrivial portion of household NPLs are strategic defaulters (borrowers with capacity to pay), highlighting need to strengthen internal arrears management and share borrower credit-worthiness information across lenders. ### Implementation of insolvency and foreclosure frameworks - Implementation progress: - Insolvency Service (IS) operational and has received a handful of applications, mainly for simplified debt relief for relatively small unsecured debts. - First group of insolvency professionals authorized; new IT system being developed; training of judges and insolvency professionals has started. - Additional needs: increase IS staffing, complete IT roll-out, adopt court rules for personal insolvency procedures, address licensing teething issues for IPs, and prepare court rules for corporate reorganization. - For foreclosures: banks intend to sell foreclosed commercial and non-primary residences; necessary elements for real estate auctions reportedly in place. - Framework review and coordination: - Authorities will review initial implementation experiences by end-January to inform legislative changes to be adopted by the Council of Ministers by end-February (modified SB) instead of end-January. - Close coordination among government stakeholders is needed, leveraging insolvency project team expertise under the Ministry of Finance. ### Property market and title deed reforms - Measures taken: - New law adopted in September to facilitate title transfers for legacy cases; over a thousand applications filed and being processed by the Department of Land and Surveys. - Authorities preparing legislation for swift transfer of titles in non-legacy cases; envisages mandatory use of an escrow institution in property transactions to ensure encumbrances are lifted once purchase price paid in full. - Timing and next steps: - Legal complexity requires additional time; implementation delayed from end-October 2015 SB to end-January 2016 (modified SB). - Authorities should assess whether additional measures, such as legal or contractual standards for property transactions, are warranted. ### ECB Single Supervisory Mechanism (SSM) capital review and recapitalization - SSM assessment: - SSM assessment finalized in December, using end-2014 data, identified provisioning shortfalls in the coops; staff has not been granted access to data necessary to review the SSM’s assessment. - BoC and Hellenic indicated preliminary findings of provisioning shortfalls in their banks. - To address identified shortfalls, banks will be required to adopt capital plans approved by the SSM. - Staff analysis: capital needs assessment for Cyprus is very sensitive to assumptions on house prices, cure rates, and time to restructure or liquidate. - Actions taken: - Coops raised provisions by about €525 million (3 percent of GDP) in the third quarter in response to the SSM assessment. - Government provided an upfront injection of €175 million (1 percent of GDP) of additional public funds into the coops in late December, following Parliamentary approval of a five-piece legislative package. - This follows a €1.5 billion (8.6 percent of GDP) recapitalization of the coops carried out in 2014 as part of the program. - Coops agreed an updated restructuring plan with European competition authority (DG COMP) aiming at long-term viability without future public funds. ### Cooperative sector restructuring and governance - Operational changes: - Cooperative Central Bank (CCB) centralizing customer contact centers and debt recovery function to manage NPLs of individual coops. - Work underway to analyze and segment NPL portfolio to develop targeted restructuring policies. - Measures to strengthen financial control and reporting expected to be completed during 2016. - Remaining challenges and requirements: - Limited centralization continues to pose turnaround challenges; strong central functions (finance, risk, compliance, audit) require strengthened staffing and capacity. - Risk function to be upgraded in structure, procedures, and tools by June 2016. - Box 1 highlights of the new coop restructuring plan: - Tier 1 capital ratio of the coops raised to 14 percent; provisioning coverage of 90-day past-due loans boosted to 50 percent after Q3 augmentations. - Operational restructuring centralizes NPL management, financial management and control, credit risk management, and audit at the CCB; CCIs retain customer-facing functions. - Privatization: initial listing on Cyprus Stock Exchange expected by 2017; by September 30, 2018, CCB expected to sell on the Exchange new shares equal to at least 25 percent of existing capital; additional issuances by June 30, 2019 and a year later; Republic of Cyprus stake expected to fall to 25 percent or less at end of process. - Graduated wage reductions (zero for low wage employees to 25 percent for the highest paid) carried over from previous plan. ### Capitalization of Greek bank subsidiaries - Importance and status: - Greek subsidiaries hold 13 percent of system deposits and are systemic as a group. - Since late 2014, subsidiaries have significantly reduced exposure to their parent banks and Greek risk more broadly. - Subsidiaries are supervised by the SSM as parent banks are systemic in their home country, with a limited role for the CBC. - Recent SSM capital assessment in Greece identified capital needs for Greek parent banks on a consolidated basis; gaps were filled at the consolidated group level. - Policy imperative: - It is critical that the assessment results in continued proper capitalization of the subsidiaries to ensure their stability and viability, including if they are sold by their parents. *Italic: Source — Excerpt from IMF staff report content provided in the input content unit.* ### 18. Further reforms are needed in the CBC to address some outstanding issues identified ### 18. Further reforms are needed in the CBC to address some outstanding issues identified ### Safeguards assessment and central bank (CBC) reforms - The CBC has implemented most recommendations from the safeguards assessment, but outstanding items remain: - Governance reforms (see below in governance and organization). - Improved disclosures in the financial statements. - Strengthening the legal compliance function. ### Financial sector supervision and NPLs - Strengthening supervision (MEFP ¶6): - Supervision of core Cypriot banks is now a responsibility of the SSM, with joint supervisory teams consisting of the ECB and the CBC. - The CBC has set up a central unit to coordinate NPL issues across departments and on-boarded additional personnel. - Staff stressed the need for the CBC to intensify engagement with banks, including: - Regular monitoring of banks’ key operational metrics on NPL performance. - Obtaining a good understanding of drivers of banks’ restructuring performance. - Frequent and targeted on-site visits. - Resolution of Laiki (MEFP ¶6): - Disposal of legacy Laiki’s operations abroad is expected to be finalized in the next few months. - Sale of Laiki’s stake in BoC has been further delayed. - Political initiatives have been prompted to suspend resolution measures and distribute remaining assets among Laiki’s creditors. - Laiki is a cross-border bank; responsibility for its resolution will be taken over by the European Single Resolution Board in 2016. ### Central bank governance and organization - Strengthening governance is essential to increase the effectiveness and accountability of CBC decision making. - The CBC has undertaken a governance review aimed at reinforcing the independence of the institution and its key officials. - The CBC is implementing a comprehensive reorganization to ensure staffing and functional responsibilities are adequately aligned. ### AML/CFT, customer due diligence, and de-risking risks (MEFP ¶8) - The CBC is finalizing inspections of 13 financial institutions under the 2015 inspection program and designing the 2016 program. - In December, the CBC fined the local branch of a foreign bank for failing to meet AML/CFT obligations, some 18 months after the on-site inspection. - Sanctions related to other 2014 bank inspections have not yet been issued. - Urgent need to reduce the time lag between on-site inspections, finalization of reports, and imposition of sanctions. - Additional efforts needed: - Strengthen supervision of banks and professions to mitigate AML/CFT risks. - Implement the action plan to enhance the transparency of companies. - Tax transparency and exchange of information: - Cyprus was rated largely compliant by the Global Forum review and committed to begin automatically exchanging information during 2017. - This progress, together with strengthening the AML/CFT framework and enhanced dialog with foreign regulators and other stakeholders, should help prevent de-risking by correspondent banks. ### Fiscal policy: recent outturns and projections - Primary surpluses projected for 2015 and 2016 were revised up reflecting year-to-date over-performance (MEFP ¶10). - For 2015, the cash-based projection was revised to 1.5 percent of GDP from 1.3 percent of GDP, mainly to reflect lower social transfers and goods and services expenditure, partly offset by a one-off guarantee payment reflected in capital expenditure. - For 2016, the projection was revised up by only 0.1 percent of GDP to 2.5 percent of GDP mainly because 0.2 percent of GDP from a bank levy expected to have been diverted in 2015 to the National Resolution Fund will now be diverted in 2016, as per BRRD requirements. - The projected 2016 primary surplus is consistent with the 2016 budget, requires no new measures, and implies an unchanged underlying fiscal position compared with 2014. - Automatic stabilizers would be allowed to operate if economic performance is worse than forecasted. - Previously-agreed 2017–18 primary surplus targets: - Kept unchanged at 3 percent and 3–4 percent of GDP, respectively (MEFP ¶11; Table 2). - Medium-term targets aim to reduce public debt from 109 percent of GDP in 2015 to around 70 percent of GDP by 2022, while allowing adequate space for public investment spending. - Achieving this path requires maintaining the primary surplus at about 3.5 percent of GDP beyond 2017. - If the envisaged debt-to-asset swap with the CBC (currently expected to yield 3.4 percent of GDP) and privatization transactions (expected to yield around 6 percent of GDP, 2 percent of GDP less than previously expected given the removal of the state power company (EAC) from the list of companies to be privatized) are completed and realize the expected amounts, the primary surplus target may be lowered to 3 percent of GDP without compromising the 2022 debt objective. - Accounts of the General Government, 2015-2016 (Percent of GDP) — selected figures shown in source table: - Revenue: 39.6, 39.5, 39.1, 38.8 - Taxes on production and imports: 14.9, 14.8, 14.6, 14.6 - Current taxes on income and wealth: 9.8, 9.7, 9.8, 9.6 - Social contributions: 9.0, 9.1, 9.0, 9.1 - Other revenue: 5.9, 6.0, 5.7, 5.6 - Expenditure: 40.9, 41.1, 38.9, 38.8 - Current expenditure: 37.7, 37.6, 35.7, 35.7 - Intermediate consumption: 3.6, 3.5, 3.5, 3.5 - Compensation of employees: 13.0, 13.0, 12.7, 12.7 - Social transfers: 14.9, 14.6, 14.6, 14.3 - Interest: 2.7, 3.0, 2.2, 2.5 - Subsidies and other current expenditure: 3.6, 3.6, 2.6, 2.7 - Capital Expenditure: 3.2, 3.4, 3.2, 3.1 - General Government balance: -1.3, -1.5, 0.1, 0.0 - General Government primary balance: 1.3, 1.5, 2.4, 2.5 - General Government primary spending: 38.2, 38.1, 36.7, 36.3 - Notes in table: The 2015 projection excludes the coop recapitalization; taxes on production and imports and other current expenditure are both 0.1 percent of GDP lower compared to the eighth review due to a methodological change. - The 2015 projected primary surplus excludes the impact of the €175 million (1 percent of GDP) December 2015 coop recapitalization in order to facilitate comparison with the underlying fiscal position. The transaction was financed from the government’s cash buffer in 2015. Thus, the recapitalization of the coops can be seen as raising public debt in 2016, but does not materially affect public debt sustainability (Figures 8–12). ### Structural reforms: status and outstanding actions (MEFP ¶13–16) - Fiscal structural reforms: - Reform implementation is experiencing delays mostly on revenue administration and public financial management. - Revenue Administration (MEFP ¶13): - Progress: Preparation of the first quarterly performance assessment report (covering Q3 2015) and allocating a unique taxpayer number to each individual payer across all taxes. - Delays in: - Strengthening the large taxpayer office (LTO). - Establishing an integrated legal framework for tax procedures. - Identifying tax assessment backlogs. - Reducing collectible arrears on which no collection actions had been taken (1.2 percent of GDP at end-June 2015). - Contributing factors to delays: Lengthy decision-making by the executive management team, severe staff and IT constraints, and resource allocation issues. - Staff advised: - Adequately resourcing the new organizational structures of the integrated tax department. - Tackling tax assessment backlogs by focusing first on the most recent un-assessed tax returns and calibrating collection of back taxes to individual taxpayers’ ability to pay. - Targeting arrears collection efforts to the largest debtors, including through the use of new collection enforcement tools, such as garnishment of deposits. - Public Financial Management (MEFP ¶14): - Delays in adopting the secondary legislation of the Fiscal Responsibility and Budget System Law (FRBSL), now expected for end January, due to a crowded end-2015 legislative agenda. - Parliamentary approval of the law regulating creation and functioning of state-owned enterprises (SOEs) has faced strong opposition and is not expected before end-March. - Staff stressed the importance of this law to improve oversight and governance of SOEs and urged approval as soon as feasible. - Privatization (MEFP ¶15): - Preparations for privatization of the commercial activities of the Limassol port are proceeding; transaction expected to be finalized by end-April. - Privatization of CyTA has suffered further setbacks due to protracted discussions with unions and political debate. - Laws on corporatization of CyTA and on employment issues now expected to be adopted by end-January, paving the way to seek expressions of interest. - Staff stressed importance of selling a majority stake in CyTA to attract a high-quality strategic investor. - Government intends legal unbundling of EAC into transmission/distribution and generation/supply; however, EAC was removed from the privatization list. - Growth Strategy (MEFP ¶16): - Action plan focuses on reducing red tape through simplified licensing and regulatory frameworks. - Authorities conducting assessments of impediments in tourism, building permits, e-government. - In tourism, any necessary legal amendments expected to be approved by the Council of Ministers in March 2016. - Staff cautioned against providing tax incentives and urged acceleration of the action plan. - Public Administration Reform (MEFP ¶16): - Parliamentary discussions commenced on legislation to reform the wage-setting framework and facilitate mobility of staff across the civil service. - Passage of the law now expected by end-February 2016 (modified SB; previously end-December SB). - Staff encouraged passing legislation as soon as possible given its role in ensuring an affordable wage bill and reallocating staff to meet resource needs, including in revenue administration. ### Program modalities, conditionality, and timelines - Quantitative conditionality: - All end-September 2015 performance criteria (PCs) and continuous PCs were met. - Actions corresponding to one structural benchmark were implemented with delay; actions of three others expected to be implemented by end-January and end-February 2016. - Final data for all end-December quantitative PCs for the 10th review will be available only after January 30; a waiver of applicability is required for all end-December PCs, which staff expects to have been met. - Updated conditionality proposed during the Ninth Review: - Modified Structural Benchmarks and timing: - Approval by the Council of Ministers of legislation for the issuance and transfer of title deeds in non-legacy and new property transactions — End-January 2016 - Parliamentary approval of a public administration reform package including a revision of the wage setting framework for the general government — End-February 2016 - Adoption by Parliament of legislation to remove existing impediments to the securitization of assets — End-February 2016 - Adoption by the Council of Ministers of any necessary adjustments to correct deficiencies of the insolvency and foreclosure frameworks, including legislative changes — End-February 2016 ### Risks to program implementation and financing - Risks: - Proximity to elections and differences of view within Parliament. - Potential for improving macroeconomic situation to exacerbate reform fatigue. - Challenges related to reducing NPLs. - Spillover risks from Greece. - Mitigating factors: - Adequate overall track record on program implementation over eight completed reviews. - Recent acceleration in NPL restructuring and passage of the law on sale of loans. - Authorities closely monitoring Greek-owned subsidiaries and having a range of tools at their disposal. - Financing assurances: - Program expected to be fully financed through expiration in May 2016. - Available government deposits were about €1.5 billion at end-November. - Some €0.1 billion expected from transfer of the coin-minting function from the CBC to the Treasury in early-2016. - CBC profits expected to yield the government €0.1 billion in 2016. - Expected ESM/IMF disbursement of €0.4 billion under the current review covers projected financing needs through May 2016 (including the recapitalization of the coops) (€0.6 billion), even if the final ESM/IMF tranches are not disbursed. - Given strong fiscal performance and successful issuances to the markets, authorities do not envision drawing on the program buffer for debt management operations; program buffer is no longer expected to be disbursed. - Fund exposure: - Upon completion of the final review, peak Fund exposure to Cyprus would occur in 2016 at 563 percent of quota or 6 percent of GDP. ### Staff appraisal, assessment, and policy priorities - Positive developments: - Economic activity has continued to strengthen. - Unemployment is moderating gradually. - Fiscal outturns are running ahead of projections. - Non-performing loans have stabilized and recourse to sustainable restructuring is increasing. - Bank liquidity is improving on growing system-wide deposits. - Ratings upgrades facilitated, for the third time since the crisis, successful tapping of the international bond market in October, extending the yield curve to the 10-year horizon. - Concerns and priorities: - Need to consolidate achievements while avoiding complacency. - Delays in implementation of structural reforms could damage confidence and growth in the longer term. - Political environment and regional/global uncertainties pose risks to the program. - Authorities should continue sound macroeconomic management and re-energize structural reform momentum to complete reforms envisaged for the remainder of the program. - NPL reduction imperative: - Accelerating progress in reducing banks’ high NPLs remains essential to revive lending and raise economic growth prospects. - Recent progress: legislation allowing the sale of loans and stepped up pace of debt restructuring. - Further actions needed: - Accelerate implementation of the debt restructuring framework. - Pass supporting legislation to facilitate loan securitization and swift transfer of non-legacy title deeds. - Monitor implementation of insolvency and foreclosure frameworks closely and address deficiencies by making necessary legislative adjustments and taking timely supervisory action. *Source: IMF staff report contained in _cr1626 - 18. Further reforms are needed in the CBC to address some outstanding issues identified* ### 32. The recently agreed restructuring plan for the coop banks provides a good basis for ### _cr1626 - 32. The recently agreed restructuring plan for the coop banks provides a good basis for ### Strengthening governance of cooperative banks - The recently agreed restructuring plan for the coop banks provides a good basis for strengthening governance to enhance financial stability and reduce fiscal risks. - While the coops have been significantly restructured, limited centralization has continued to pose challenges to an effective turnaround. - Policy focus under the new restructuring plan: - Effective centralization of finance, compliance, audit and risk functions. - Enhanced oversight of lending decisions and other risk-taking activities. ### Financial regulation and supervision (SSM framework) - Efforts to enhance financial regulation and supervision should continue within the SSM framework. - The CBC should: - Continue to strengthen its governance and supervisory capacity. - Intensify its engagement with the banks. - Pay close attention to ensuring that Greek-owned subsidiaries are capitalized adequately. ### Fiscal performance and structural reforms - Lock in gains from strong fiscal performance while addressing delays in fiscal structural reform implementation. - Rationale for locking in fiscal gains: - Create fiscal space to address potential risks from high public debt and contingent liabilities. - Ensure support for growth-enhancing public spending and the social safety net. - Specific reform delays to address: - Passing the public administration reform. - Enacting the secondary legislation for the fiscal responsibility and budget system law. - Passing the law regulating the creation and functioning of SOEs. - Intended outcomes of these reforms: - Ensure an affordable wage bill. - Achieve efficient public expenditure management. - Strengthen SOE governance. - Reduce fiscal risks. - Revenue administration reform: - Step up efforts to broaden the tax base and improve horizontal equity across taxpayers while protecting revenue collection. ### Growth-enhancing reforms and privatization - Implementation of growth-enhancing reforms should be stepped up. - Authorities should press ahead with a comprehensive privatization program to support investment and efficiency. - To lessen regulatory burden on economic activity: - Move forcefully to implement concrete actions to improve the business environment. - Avoid the pitfalls of tax incentives. ### Program endorsement - On the basis of continued progress under the program and policy commitments going forward, staff supports the completion of the ninth review and the authorities’ request for waivers of applicability on the end-December performance criteria. ### Box 2 — The Role of Fixed Investment in GDP Dynamics - Cyprus experienced a double dip drop in GDP since the onset of the global financial crisis (GFC). - GDP declined modestly in 2009, recovered in 2010–11, and fell into a deeper recession during 2012–14. - GDP growth returned to positive territory in 2015, but GDP remains 6½ percent below its 2007 level. - Fixed investment developments: - Fell by more than half relative to its 2007 level, bottoming out in 2014. - Share of fixed investment in GDP fell from 27 percent in 2008 to around 12½ percent in 2015. - The contraction in fixed investment has withdrawn more than 15 percentage points from GDP (relative to 2008). - Housing construction accounted for more than three-quarters of the decline since 2008. - Investment in machinery was much less affected. - Projections: - Medium-term output growth is expected to average 1¾ percent per year. - Private consumption restrained by deleveraging; continued fiscal prudence expected to dampen public consumption. - Fixed investment projected to grow at 4 percent per year—faster than total GDP. - By 2020, fixed investment would have only reached about 55 percent of its 2007 level. ### Box 3 — Revisions to External Statistics - In October 2015 the CBC published revised BoP, IIP, and external debt statistics for 2008–13 reflecting: - Adoption of BPM6 methodology. - Recommendations of an EU special task force. - Improved data coverage from new data sources. - Revisions made the external statistics consistent with national accounts (ESA 2010). - Main change: inclusion of ship-owning and financial Special Purpose Entities (SPEs) registered in Cyprus, reclassified as residents under BPM6. - This reclassification has a large negative impact on Cyprus’ external debt, reflecting substantial external liabilities of the ship-owning and financial SPEs—more than a quarter of external debt (about 150 percent of GDP). - Large deterioration of Cyprus’ net external position (IIP) is due mainly to the ship-owning SPEs, which have large external financial liabilities (mostly equity and loans) but no external financial assets (although they have large real assets in the form of ships). - The SPE reclassification significantly impacts BoP accounts: - Imports and exports of goods: affected by periodic registration and de-registration of ships. - Imports and exports of services: affected by services provided to and by ship-owning and financial SPEs. - Primary income and financial accounts: affected by investment income and capital flows related to SPEs. - Overall, the historical current account balance for the most part did not change significantly. ### Box 4 — The New Law on the Sale of Loans - Law “On the Sale of Credit Facilities and Other Related Issues” adopted by Parliament on November 12, 2015. - Key features: 1. Scope: - Applies to loans to individuals and micro- and small SMEs not exceeding €1 million. - Specifically exempt: loans to non-residents; loans to finance operations and/or investments outside Cyprus; loans secured by property located outside of Cyprus; loans governed by foreign law. - Provisions concerning notification of the borrower by the original creditor and the acquiring party also apply to loans in excess of €1 million (“big loans”). 2. Licensing and regulation of loan acquiring companies: - Loans of less than €1 million can be sold to: - (i) Cypriot authorized credit institutions, - (ii) subsidiaries or branches of credit institutions authorized by the EU that operate in Cyprus, - (iii) non-bank “credit acquiring companies”. - Further re-sale allowed to any of the above institutions, or to other persons with prior written approval of the CBC. - A non-bank company wishing to buy loans must be incorporated in Cyprus and obtain a license from the CBC. - Licensing conditions include a minimum capital requirement (€100,000), “fit and proper” requirements for shareholders and directors, and an assessment that the company can provide proper services and that its operations plan does not pose risks to financial stability in Cyprus. - The CBC is required to supervise on an ongoing basis the company’s management, the books and records, and financial reporting. - All credit institutions must report to the CBC semi-annually on their sale of loans activities. - Violations of the Law are subject to administrative and criminal liability. *Source: _cr1626 - 32. The recently agreed restructuring plan for the coop banks provides a good basis for* ### 3. Other Conditions: In addition to the conditions mentioned in 2 above, the sale of loans covered by the ### 3. Other Conditions: In addition to the conditions mentioned in 2 above, the sale of loans covered by the ### Notification and borrower opportunity - Prior to the sale of all or part of the loan portfolio, the credit institution should notify its intention to sell either (i) through a publication in the Official Gazette and in three daily newspapers, or (ii) by a letter to the borrower and its guarantors. - In both cases the borrower and the guarantors may (but are not required to) submit, within 45 days, a proposal to purchase the loan. - Such a proposal is not binding on the creditor. ### Acquirer obligations - The acquirer should notify the borrower within five days of the acquisition and provide new contact and payment information. ### Protections for small loans - In the case of small loans, borrowers retain the protections under the Code of Conduct. ### Market expectations and likely application - While the Law now allows loans to be sold, it remains to be seen whether it will be used actively to facilitate the clean-up of banks’ balance sheets. - So far, banks indicated publicly that they do not foresee selling mortgage loans related to primary residences. - In addition, in the case of small loans, the discount needed to attract potential buyers may make sales unappealing for banks. - It is therefore expected that the law would be applied more frequently in the case of big loans, and to buyers with demonstrated expertise in recovering value. ### Potential disincentives and risks - Some of the provisions of the Law could reduce the attractiveness of loan purchases due to concerns about legal and compliance risks. *Source: Excerpt from the IMF content unit titled "3. Other Conditions: In addition to the conditions mentioned in 2 above, the sale of loans covered by the" (provided content).* ### Annex I. Banks’ NPL Restructuring Targets and Performance ### Annex I. Banks’ NPL Restructuring Targets and Performance ### Overview - Cypriot banks have increased NPL restructuring activity and improved NPL management. - A CBC targeting framework for loan restructuring was introduced to incentivize improved pace and quality of restructurings. - Aggregate data for end-September 2015 indicate: - satisfactory performance against targets for successful restructurings and early arrears management; - increased volumes of proposed and concluded sustainable restructurings, but below target. ### Restructuring volumes and NPL evolution - Restructured fixed term loans (excluding revolving facilities), defined as loans with concessions granted since January 2014 to borrowers experiencing or about to experience financial difficulties: - reached €6.2 billion (26 percent of NPLs) on a cumulative basis at end-September 2015; - compared to €5.6 billion at end-June 2015 and €4.1 billion at end-2014. - NPLs remained largely constant in recent months at just below 60 percent. - This persistence largely reflects interest accrued on existing NPLs and a probation period of 12 months before reclassified as performing for restructured loans (EBA definitions noted). - Even if all restructured NPLs did not re-default, NPLs would still be at 44 percent of gross loans. ### Banks’ internal arrears management measures - Each bank has created a centralized arrears management unit focused on: - responding proactively to early arrears to prevent migration into NPLs; - using targeted strategies for different segments (e.g., debt-for-property swaps for major corporates; new flexible products for SMEs). - Banks report detailed operational indicators (restructuring rate, re-default rate, cash collection rate) by loan vintage and segment. ### CBC restructuring targeting framework - The CBC sets aggregate quarterly restructuring targets covering the whole portfolio and sub-portfolios: small and large corporates, residential mortgages, and other retail loans. - Targets apply to four indicators: 1. Proposed sustainable solutions — sustainable modifications proposed during a given quarter (as a percentage of the value of loans in arrears for more than 90 days). 2. Concluded sustainable solutions — modified terms agreed during a given quarter (as a percentage of the value of loans in arrears for more than 90 days). 3. Successful restructurings — loans restructured and subsequently in arrears for less than 8 days (as a percentage of the value of loans restructured since January 2014). 4. Early arrears management — loans in arrears between 30 and 90 days at the beginning of the quarter but no longer in arrears at the end of the same quarter (as a percentage of the value of loans in arrears between 30 and 90 days at the beginning of the quarter). - Banks submit quarterly reports indicating actual performance and targets for the following two quarters; the CBC may revise banks’ targets upward if deemed insufficiently ambitious. ### Q3 2015 targets and performance (end-September 2015) - Successful restructurings (Indicator 3): - Actual: €2 billion, or 68.2 percent of the loans restructured since January 2014. - Target: 66.5 percent. - Early arrears management (Indicator 4): - Actual: 31.2 percent, amounting to €1.2 billion of loans that were in early arrears at the beginning of the quarter and exhibited no arrears at the end of the quarter. - Target: 27.8 percent. - Proposed sustainable solutions (Indicator 1) — Q3 2015: - Banks proposed sustainable restructuring solutions for €9.6 billion of loans, accounting for 6.3 percent of the value of loans in arrears for more than 90 days as of end-Q2 2015. - Target: 9.4 percent. - Concluded sustainable solutions (Indicator 2) — Q3 2015: - Concluded sustainable solutions reached 6.5 percent of loans in arrears for more than 90 days as of end-Q2 2015. - Target: 7.5 percent. - To compensate for underperformance in Q3, Q4 targets were revised up: - Proposed sustainable solutions: from 11.5 percent to 12.5 percent. - Concluded sustainable solutions: from 10.1 percent to 11.6 percent. ### Financial sector policy commitments and operational actions (from MEFP) - Priority: reduce high level of NPLs in the banking system; approach from three fronts: 1. Ensure effective implementation of foreclosure and insolvency regimes. 2. Strengthen enforcement of supervisory tools for arrears management. 3. Revise legislation to facilitate banks’ disposal of distressed assets. - Legal framework actions: - Insolvency Service operational and issuing authorizations to insolvency practitioners. - Actions taken for real estate auctions under the new foreclosure law. - Recommended preparation of court rules to be adopted by end-March 2016; regulations for insolvency framework adopted. - Capacity building and initial training for insolvency practitioners conducted. - Review of Civil Procedure Law consultations initiated; necessary amendments to be approved by the Council of Ministers by end-March 2016. - Assessment of functioning and initial experiences with private sector debt restructuring and foreclosure frameworks by end-January 2016; plan to remedy deficiencies and tax disincentives to follow. - Based on review, by end-February 2016 (modified structural benchmark), the Council of Ministers to adopt necessary adjustments to insolvency and foreclosure frameworks. - Borrower education: - By end-January 2016, the CBC to deploy a tool on its website allowing borrowers to compare quantified resolution options based on borrower-entered scenarios. - Title deeds and property market: - Implementation started to address legacy cases; applications received and title transfers to start in early 2016. - Legislation to deal with non-legacy and new property transactions to be approved by the Council of Ministers by end-January 2016 (modified end-October 2015 structural benchmark) and adopted by Parliament by end-February 2016. - Parliament to adopt legislation by mid-February 2016 to remove existing obstacles (where ratification is required) to accelerate issuance of title deeds. - Supervision and CBC actions: - CBC intensifying monitoring at micro- and macro-prudential levels and coordinating with the SSM; central coordination function for NPL issues established. - By end-June 2016, CBC to review the treatment of accrued interest on NPLs for supervisory purposes. - Debt resolution reporting and targeting: - Banks began submitting monthly data in line with expanded requirements in September. - CBC to agree with banks new targets covering the first half of 2016 by end-February 2016. - During 2016, targets’ horizon to be extended gradually to four quarters ahead and scope expanded to cover all relevant resolution activities; CBC will forecast future path of system-wide loan restructuring and recovery based on these targets. - Financial information and borrower capacity: - CBC to publish final results of a study on borrowers’ financial situation by end-January 2016. - By end-February 2016, steps to ensure timely submission of audited financial statements to the company registrar to increase availability of SME and corporate financial information. - Secondary market and sale of loans: - Law on the sales of loans adopted (end-September structural benchmark); CBC to adopt implementing regulations promptly. - Council of Ministers to approve by end-January 2016 draft legislation to remove impediments to securitization (including removal of prior consent requirement and tax changes); law to be adopted by Parliament by end-February 2016 (modified end-December 2015 structural benchmark). *Source: Annex I. Banks’ NPL Restructuring Targets and Performance (extracted from the provided IMF content).* ### 4. We continue our efforts to strengthen the coops sector. To reinforce the cooperative ### _cr1626 - 4. We continue our efforts to strengthen the coops sector. To reinforce the cooperative ### Strengthening the cooperative (coops) sector - Recapitalization: - The cooperative sector has completed its recapitalization with public funds, in line with supervisory requirements. - Restructuring and value enhancement: - Identified actions to enhance the sector’s financial prospects and shareholder value, including reviewing structure and operations. - Implementing measures to speed up loan restructuring, strengthen governance, increase efficiency and improve management information systems. - Governance actions: - Time-bound action plan to consolidate control functions: risk, audit and compliance. - Further steps to centralize operations and streamline management by reviewing the delegation framework to consolidate strategic decisions and oversight at the CCB while delegating implementation within the sector. - In December, an updated restructuring plan was adopted, including a schedule to reduce the state’s stake in the coop sector over the medium term. - Arrears management: - By end-January 2016, the CCB will review the sector’s NPL portfolio to tailor resolution strategies. - By end-February 2016, the sector will establish a single contact center to manage early arrears. - CCB to ensure adequate resources to equip the restructuring function with sufficient qualified staff. - Financial control and risk processes: - CCB implementing plan to strengthen financial control and reporting, including upgrading the management information system. - New structure of the financial control division, including strengthened staffing and capabilities, to be completed by end-March 2016. - Implementation of the risk function action plan (structure, procedures, capacity, tools) will be completed by June 2016. - Ensure the sector’s risk management function is adequately involved in risk-taking decisions and retains veto powers. ### Maintaining adequate liquidity - Central Bank of Cyprus (CBC) actions: - CBC continuously monitors liquidity conditions and encourages banks to maintain adequate liquidity buffers. - CBC stands ready to take appropriate measures if needed, following CBC and Eurosystem procedures and rules. - Additional government guarantees for issuance of bank bonds could be used as collateral against liquidity, but only if necessary to safeguard financial stability. ### Strengthening financial sector supervision - Coordination with the SSM: - Ensure sufficient resources at the CBC to carry out supervision and resolution duties in close coordination with the SSM. - Review regulatory framework against European best practices; by end-January 2016 streamline directive on loan origination. - Subsidiaries of Greek banks in Cyprus: - Continue working with European institutions to ensure Greek subsidiaries operating in Cyprus remain adequately capitalized. - Expanding credit information: - Strengthen the credit registry by establishing a credit scoring system available to banks and other creditors. - By end-January 2016, drawing on external expertise, determine additional data needs. - Resolution of Laiki: - Disposal of Laiki’s foreign assets held in Malta, Romania, Serbia, Russia and Ukraine is expected to be completed within the next few months (led by an independent advisor). - Starting in 2016, responsibility for resolution of Laiki will be assumed by the European Single Resolution Board. - Insurance and pension supervision: - Finalize transposition of the European Solvency II Directive into national law. - Prepare an action plan to integrate insurance sector and pension fund supervisions; submit to Parliament draft legislation by end-March 2016 ensuring adequate resourcing. - Conduct review of insurance undertakings during 2016, including on-site inspections covering a high percentage of the insurance market in the context of the planned 2016 EIOPA EU-wide stress test exercise. ### Strengthening the AML/CFT framework - AML/CFT supervision of banks: - CBC finalizing onsite inspections under the 2015 supervisory plan, in line with the new risk-based AML/CFT supervision methodology. - Inspection plan for 2016 approved by the Governor; will rely on assistance of external auditors. - CBC recently fined the local branch of a foreign bank for AML/CFT breaches identified in 2014 inspections; intends to impose sanctions where breaches identified in 2014–15 inspections have not yet been sanctioned. - CBC will streamline procedures to reduce time between visits, report finalization, and imposition of sanctions. - AML/CFT supervision of professions: - Cyprus Securities and Exchange Commission will recruit additional qualified supervisors and conduct inspections per yearly supervisory program. - CBA and ICPAC will continue providing training; CBA and ICPAC will apply sanctions to lawyers and accountants respectively when appropriate. - Registrar of Companies: - Reorganization of the Department of the Registrar of Companies will begin by end-March 2016 to modernize operations in line with the new company law. - In December, more than 55,000 non-active and non-compliant companies were struck off the registry after required notifications. ### Fiscal policy outcomes and targets - Outturn through September: - Cash primary surplus of 1.9 percent of GDP, compared with a target of 1.7 percent of GDP. - Better-than-expected outcome driven by improved economic environment, lower unemployment and redundancy benefits, and reduced social transfers; achieved despite temporary lower revenues in Q3 (postponement of immovable property tax deadline) and higher other current expenditure (accelerated payments to the EU budget) to be reversed in Q4. - Targets revised upward due to sustained overperformance: - Target for 2015 raised by 0.2 percent of GDP to 1.5 percent of GDP. - Target for 2016 raised by 0.1 percent to 2.5 percent of GDP (some payment to the National Resolution Fund expected in 2016 rather than 2015). - Increase in primary surplus in 2016 reflects dissipation of negative one-off factors in 2015 and will not depend on new fiscal measures. - Automatic stabilizers will be allowed to operate if economic activity turns out worse than forecasted. - Medium-term fiscal targets: - Primary surplus target of 3 percent of GDP for 2017. - Primary surplus target of 3-4 percent of GDP for 2018 and beyond. - December: Parliament adopted 2016 budget documents including a medium term fiscal framework for 2016-18. ### Structural reforms - Welfare reform: - Comprehensive welfare reform to ensure a guaranteed minimum income (GMI) and more efficient benefit administration. - By end-January 2016, finalize an assessment of GMI implementation (main outcomes, number of applications, fiscal costs, targeting accuracy, coverage) and identify areas for improvement. - Adopt a unified legislative framework to improve targeting of disability benefits while preserving budget neutrality. - December: law adopted to unify administration of education benefits and established a registry of benefits; re-examine overall welfare reform by end-March 2016 to realize efficiency gains from consolidated information. - Revenue administration integration: - Finalize integration of the new tax department (CTD) by end-June 2016 while protecting revenue performance. - Prepare quarterly revenue performance reports based on monthly indicators of key CTD functions since September. - November: single registration process for new taxpayers covering all domestic taxes implemented. - Existing taxpayers to receive a unique tax identification number; cleansing of corporate taxpayer register planned for end-January 2016. - Ensure adequate human resources for LTO by end-March 2016 to cover taxpayer services, risk assessment and compliance, with a view to gradually expanding LTO coverage to 50 percent of revenue. - By end-January 2016, Council of Ministers to approve a new tax procedures code. - By end-June 2016, strengthen legal framework governing the criminal tax investigations unit, including judicial oversight and increased coordination with law enforcement. - Addressing assessment backlogs and tax arrears: - Prepare an action plan to reduce backlog of un-assessed tax returns to identify size and nature of backlog and determine taxes and refunds due. - Adopted an arrears recovery plan targeting largest debts and using new collection enforcement tools, such as garnishment; plan to be implemented continuously. - Public financial management reforms: - By end-January 2016, Parliament to adopt pending Fiscal Responsibility and Budget Systems Law (FRBSL) regulations. - By end-February 2016, adopt new budget classification and chart of accounts as part of the new Enterprise Resources Planning System. - By end-January 2016, prepare an updated risk assessment report incorporating a new methodology and strengthen financial reporting by local governments and SOEs in line with FRBSL. - Parliament will adopt the SOEs law by end-March 2016. - Treasury and Ministry of Finance to cooperate with competent bodies and Auditor General to improve timely reporting and publication of audited financial statements of general government entities and SOEs. - Privatization milestones: - Privatization plan includes CyTA (telecoms), EAC (electricity), and commercial activities of the Limassol port. - Select winning bidder for concession of commercial activities of the Limassol port by end-March 2016; sign concession agreement by end-April 2016. - Regulatory framework of the Cyprus Port Authority (CPA) to be amended by end-January 2016 and implemented before new concessioner in place. - Bills on CyTA’s corporatization and employee options post-privatization to be adopted by Parliament by end-January 2016; call for expression of interest to be launched immediately afterwards, with a view to finalizing CyTA’s privatization within 9 months. - Submit legislation for unbundling the Electricity Authority of Cyprus during 2016; unbundling implemented no later than 2017. - Other growth and public administration reforms: - Implementing the Action Plan for Growth; Smart Regulation plan to eliminate red tape, monitored through semi-annual progress reports starting May 2016. - Assessment of tourism regulatory framework finalized; legal amendments to modernize framework to be approved by Council of Ministers by end-March 2016. - Time-bound action plan to strengthen enforcement of contracts, including streamlining judicial procedures. - By end-February 2016, prepare a framework to attract strategic investments through fast-tracking administrative licensing; legislation to implement framework approved by Council of Ministers by end-March 2016. - By end-February 2016, Parliament to adopt a public administration reform package including revision of wage setting framework and opening promotion posts to the wider civil service (modified end-December 2015 structural benchmark). - Salary and employment decisions to be consistent with general government compensation of employees as a share of GDP remaining on a descending path over the medium term; complement with reforms to enhance staff mobility. ### Program financing and monitoring - Financing: - Financing for the program is assured; financing buffers boosted by recent debt issuance in international markets used to extend duration of debt, smooth maturities and minimize refinancing risk after the program. - Transfer of rights and liabilities associated with coins issuance from the CBC to the MoF will provide additional financing of €100 million by end-January 2016. - CBC expected to transfer an additional €100 million in central bank profits to the government during 2016, in line with CBC duties under the Treaties and the Statute. - Program implementation and conditionality: - Policy implementation includes performance criteria and structural benchmarks defined in Tables 1 and 2 and the Technical Memorandum of Understanding (TMU). - Continuous performance criteria: non-accumulation of external payment arrears; non-imposition of restrictions of payments and transfers for current international transactions; non-introduction of multiple currency practices. - Penultimate program review reached; performance under the program described as strong. - Authorization: - IMF authorized to publish the Memorandum of Economic and Financial Policies, its attachments, and the related staff report. ### Quantitative conditionality (selected figures from Table 1) - Performance Criteria (Millions of euros unless otherwise specified) — Dec-15 target / Adjusted target / Actual: - Floor on the general government primary balance 3/: 300 / 323 / 232 - Ceiling on the general government primary expenditure 3/: 4,659 / 4,598 / 6,660 - Ceiling on the stock of general government debt 5/: 19,269 / 19,249 / 19,114 / 18,532 - Ceiling on the accumulation of new general government guarantees 3/6/: 935 / 554 / 133 - Ceiling on the accumulation of external arrears 3/: 4,000 / 0 / 0 - Ceiling on the accumulation of domestic arrears 3/: 0 / -20 - Ceiling on the accumulation of tax refund arrears by the general government 3/: 33 / 33 / 3 - Footnotes and adjustments: - 1/ As defined in the technical memorandum of understanding. - 2/ Targets are unchanged relative to the 8th review as Board discussion of the 9th review occurs after the end-December test date. - 3/ Cumulative since January of the corresponding year. - 4/ Continuous performance criterion. - 5/ Adjusted target down by €20 million due to the non disbursement of the Entrepreneurship Fund EIB loan as per the TMU. - 6/ Adjusted target down by €38 million due to a disbursement of €53 million government guaranteed EIB loans compared to €91 million projected until end Q3 as per TMU. ### Selected structural benchmark timings (from Table 2) - Approval by the Council of Ministers of legislation for the issuance and transfer of title deeds in non-legacy and new property transactions: End-January 2016 - Parliamentary approval of a public administration reform package including a revision of the wage setting framework for the civil service: End-February 2016 - Adoption by Parliament of legislation to remove existing impediments to the securitization of assets: End-February 2016 - Adoption by the Council of Ministers of any necessary adjustments to correct deficiencies of the insolvency and foreclosure frameworks, including legislative changes: End-February 2016 *IMF staff report content as provided in the source document.* ### 1. This Technical Memorandum of Understanding (TMU) sets out the understandings regarding ### _cr1626 - 1. This Technical Memorandum of Understanding (TMU) sets out the understandings regarding ### Overview - The TMU defines indicators subject to quantitative targets (performance criteria and indicative targets) specified in tables annexed to the Memorandum of Economic and Financial Policies (MEFP). - It describes methods for assessing program performance and information requirements for monitoring targets. - The authorities will consult with the Fund, European Commission and ECB before modifying measures or adopting new measures that deviate from program goals and will provide necessary information for program monitoring. ### Program Exchange Rates - For program purposes, all foreign currency-related assets, liabilities, and flows will be evaluated at “program exchange rates”, except items affecting government fiscal balances, which 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 A. Floor on the General Government Primary Cash Balance (GGPCB) — performance criterion - General government coverage (ESA 2010 EDP reporting): central government, local governments, social security funds, and any newly created institutions defined as general government under ESA 2010. - Central government includes: Constitutional Powers, Constitutional Services, Independent services, Independent offices, Ministries and departments, services, and other bodies they supervise, 21 special purpose funds, and 14 semi government organizations. - Local governments comprise 39 municipalities, 356 village authorities, and agencies/institutions attached thereto classified as local governments according to ESA 2010. - Social security funds include: medical treatment scheme, regular employees’ provident fund, social insurance fund, holiday fund, redundancy fund, protection of the rights of employees’ fund. - GGPCB definition: GGPCB = general government cash balance (GGCB) minus general government interest receipts plus general government interest payments. - GGCB = total revenue (tax revenue, social security contributions, grants and other revenue) minus 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 definition: receipts from disposal to private owners by a government unit of the controlling equity of a public corporation or quasi-corporation. - Adjustments to GGPCB floor: - Adjusted downwards by payments related to bank support when carried out under the program’s banking sector support and restructuring strategy. Transactions that may be excluded: loans to financial institutions and investments in equity of financial institutions (requited recapitalization); unrequited recapitalization; purchases of troubled assets. - Any financial operation by central government to support banks, including issuance of guarantees or provision of liquidity, will be immediately reported to IMF, European Commission and ECB staff. - Specific 2015 adjustments: - Adjust downwards by payments to compensate pension funds for losses related to the resolution of Laiki Bank up to €0.5 million. - Adjust upwards by dividends received from the CBC in excess of €133 million and in excess of €58 million from semi-government organizations. - Adjust downwards by dividends received from the CBC below €133 million and below €58 million from semi-government organizations. - Adjust downwards by payments to cover called government guarantees up to €80 million. B. Ceiling on the General Government Primary Expenditure (GGPE) — performance criterion - GGPE includes compensation of employees, goods and services, subsidies, social benefits, other recurrent expenditure, and capital expenditure. - Adjustments: - Ceiling adjusted upwards by payments related to bank support when carried out under the program’s banking sector support and restructuring strategy (same transaction exclusions as GGPCB). - 2015 ceilings adjusted upwards by payments to compensate pension funds for losses related to the resolution of Laiki bank up to €0.5 million. - 2015 ceilings adjusted upwards by payments to cover called government guarantees up to €80 million. C. Ceiling on the Stock of General Government Debt — performance criterion - General government debt: total outstanding gross liabilities as defined by ESA 2010, including debt of all institutions included in general government and other ESA 2010 adjustments; measured at nominal value. Program exchange rate applies to all non-euro denominated debt. - Debt ceiling adjustments: - Upwards (downwards) by amount of any upward (downward) revision to the stock of end-December 2014 general government debt. - Upwards (downwards) by amount of 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 such central government financial operations to support banks will be immediately reported to IMF, European Commission 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. D. Ceiling on the Accumulation of New General Government Guarantees — performance criterion - Ceiling includes domestic and external guarantees granted during the test period, and guarantees for which 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 (e.g., state owned enterprises) but within the non financial public sector are not permitted to grant guarantees. - Stock of guarantees at end-December 2014: €2.95 billion. - Guarantees by the Central Agency of Equal Distribution of Burdens (newly added to general government) will not exceed €2 million. - Adjustments: - Upwards for issuance of government guaranteed bonds to be used in monetary policy operations to boost BoC’s liquidity up to €2.9 billion. - Upwards (downwards) by amount of 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. E. Ceiling on the Accumulation of External Arrears — continuous performance criterion - External payment arrears: payments on debt to non-residents contracted or guaranteed by general government, unpaid within seven days after falling due. - Stock of external payment arrears as of end-December 2014: €0. F. Ceiling on the Accumulation of Domestic Arrears — performance criterion - 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 considered in arrears 90 days after initiation of the invoice. - Stock of domestic expenditure arrears as of end 2014: €9.6 million. - Increases below €1 million will not be considered a breach of the performance criterion. G. Ceiling on the Accumulation of VAT Refund Arrears — performance criterion - VAT refund arrears: unpaid VAT refunds past due date for payment established in tax legislation and/or corresponding regulations. - Stock of VAT refund arrears as of end-December 2014: €117.3 million. - The stock of VAT refund arrears shall not exceed €150 million. ### Monitoring of Structural Benchmarks and MEFP Commitments - AML supervision implementation: - Quarterly, supervisory competent authorities will, confidentially and anonymized, grant Fund staff access to supervisory assessments and information about enforcement actions applied for non-compliance and/or violations of laws and regulations. - For the CBC: in line with the 2015 annual inspection program, onsite supervision missions will start in the first quarter and step-up during the year. The 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 (Table 1 summary of supporting data, frequency, responsible institution, and submission lag) - Detailed execution of revenues, expenditure and financing in EDP reporting format: - Frequency: Monthly - Institution: MOF. Budget Department/Cystat Government Financial Statistics - 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, maturity, currency, type of debt holder; details on financial balance sheet transactions: - Frequency: Monthly - Institution: MOF. Public Debt Management Unit - Maximum time lag: 27 days after the end of the month - Central Government Debt stock by type, interest bill schedule through 2020: - Frequency: Monthly - Institution: MOF. Public Debt Management Unit - Maximum time lag: 27 days after the end of the month - Budgetary Central Government deposits in the Consolidated Fund and in the Banking System: - Frequency: Monthly - Institution: 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 of expenditure: - Frequency: Monthly - Institution: MOF. Treasury Department - Maximum time lag: 15 days after the end of the month - Stock of VAT refund arrears: - Frequency: Quarterly - Institution: Tax Department - Maximum time lag: 15 days after the end of the quarter - Stock of government guarantees and monthly flows by institution: - Frequency: Quarterly - Institution: MOF Treasury Department - Maximum time lag: 27 days after the end of the month - Stock of external arrears: - Frequency: Monthly - Institution: MOF. Treasury Department - Maximum time lag: 15 days after the end of the month - Assets and liabilities of the central bank: - Frequency: Monthly - Institution: Central Bank of Cyprus - Maximum time lag: 30 days after the end of the month - Assets and liabilities of domestic operations of the banking system – aggregate monetary balance sheet by institutional category: - Frequency: Monthly - Institution: 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 - Institution: 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 with detailed information on deposits (by maturity, currency, and type of depositor), central bank funding, interbank funding, debt securities, loans provided to the public and the private sector: - Frequency: Monthly - Institution: 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 (cash and securities), liquidity position, other assets and liabilities: - Frequency: Daily - Institution: Central Bank of Cyprus - Maximum time lag: Next working day - Deposits by institution, currency, and residency and end-of-day liquidity buffers: - Frequency: Daily - Institution: Central Bank of Cyprus - Maximum time lag: Next working day - Financial soundness indicators—core set, deposits, NPLs, capital adequacy ratios: - Frequency: Quarterly - Institution: Central Bank of Cyprus - Maximum time lag: 60 days after the end of the month - Note: Reporting requirements for cooperative. ### Statement by Executive Director for Cyprus and Senior Advisor (January 22, 2016) - Acknowledgement that the ninth review under the Extended Fund Facility for Cyprus appropriately captures recent developments and reforms. - Economic recovery continued with three consecutive quarters of positive growth; slow pick-up in private consumption and broader recovery across sectors. - Financial sector: loan restructurings accelerated, deposits moderate growth, liquidity buffers improved; law on sale of loans adopted end–September 2015; cooperative sector measures undertaken. - Fiscal performance exceeded expectations; all end-September and subsequent performance criteria met. - Key macro figures and targets explicitly mentioned: - Unemployment rate: around 15 percent. - Medium-term fiscal targets: primary surplus of 3 percent of GDP for 2017 and 3-4 percent of GDP for 2018 and beyond. - 2016–18 medium term fiscal framework incorporated in adopted 2016 budget documents. - Financial sector strategy to address high NPLs: - Ensure effective implementation of foreclosure and insolvency regimes. - Enforce supervisory tools for arrears management. - Improve legislation to facilitate banks’ disposal of distressed assets. - Secondary market and securitization measures: - Law on the sales of loans adopted end–September 2015; retains borrower protections under the Code of Conduct. - Council of Ministers expected to approve draft legislation to remove impediments to securitization by end of the month; law to be adopted by Parliament by the end of next month. - Structural reforms progress: - Reforms underway in goods and services market, public administration, public financial management, housing market, health, and energy. - Comprehensive welfare reform efforts to ensure guaranteed minimum income and more efficient administration of social benefits. - Revenue administration reform and integration of the new tax department by mid 2016 while protecting revenue performance. - Privatization progress and plans: - Privatization plan includes CyTA telecommunication, EAC, and commercial activities of the port of Limassol. - Efforts to have corporatization and employment bills for CyTA adopted by Parliament by end-January 2016; call for expression of interest to be launched immediately afterwards. - Independent energy advisor appointed to assist with drafting legislation for effective unbundling of the Electricity Authority of Cyprus during the year. - Announcement of selected bidder for concession of commercial activities of port of Limassol expected by end-March 2016; concession agreement targeted by end-April 2016. - Regulatory framework of Cyprus Port Authority (CPA) to be amended by end-January 2016 and implemented before new concessioner is in place. - Conclusion: After almost three years of adjustments, Cyprus reached the penultimate program review with strong performance while acknowledging remaining significant challenges. *IMF Staff and Cypriot authorities; Technical Memorandum of Understanding (TMU) and Executive Director statement as provided in the source content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1626.pdf_