Transcript of a Conference Call on the Second Review Mission to Cyprus

November 13, 2013

Washington, D.C.
November 7, 2013

Delia Velculescu, Mission Chief for Cyprus, European Department; and
Ángela Gaviria, Communications Department

MS. GAVIRIA: Good morning, everyone. I'm Angela Gaviria with the Communications Department of the IMF. Welcome to this conference call on the conclusion of the second review mission on the Extended Fund Facility with Cyprus. A joint statement with our European partners should be out shortly after this call. The main speaker today is the mission chief for Cyprus, Delia Velculescu, who will have some remarks to make at the start and then she'll be happy to take your questions. Delia?

MS. VELCULESCU: Yes, thank you, Angela, and thanks for having me here.

Today we have finalized the second review mission for the macroeconomic adjustment program supported by official financing assistance from the ESM and the IMF. The program's objectives are to restore the health of the financial sector, to put public finances on a sustainable path, and adopt structural reforms so as to support a return of growth while protecting those most vulnerable. The conclusion of our mission is that the program remains on track. Good progress has been made in all areas.

First, fiscal performance has been strong and all program targets were met with comfortable margins. This is due to an ambitious consolidation that is now underway, as well as to restraint in budgetary spending and to better than projected revenue performance, given a less-severe economic contraction than initially expected.

Indeed, program projections for growth for this year were revised to -7.7 percent, which is 1 percentage point better than expected. This reflects data through the second quarter, as well as more recent indicators on tourism, trade, confidence, and others.

While the data is better than expected, the situation remains very difficult, with disposable incomes falling and unemployment rising. Over a two- to three-year horizon, the cumulative output decline has remained unchanged, given the significant but protracted need for the private sector to deleverage, as well as the fiscal consolidation underway. For 2014 growth is now projected at -4.8 percent.

Second, there has been significant progress in the restructuring and recapitalization of the financial sector. Hellenic Bank was recapitalized ahead of schedule with private funds, including foreign direct investment, and without any state support. Bank of Cyprus has now a board of directors in place, a CEO has been appointed, and a new restructuring plan is now in place aimed at restoring profitability over the medium term.

On the cooperative sector, funds for recapitalization have been disbursed already in a dedicated account, and as part of the restructuring strategy of the sector, four mergers of 28 institutions have already been completed.

In this context, additional relaxations of deposit restrictions have been allowed since the last review, in line with the milestone-based roadmap that was published in August.

Looking forward, the main challenge is to repair banks' balance sheets and restore depositor confidence. This will be critical to the resumption of credit to the private sector that is necessary for growth to resume. This will require diligent implementation of banks' restructuring plans, including efforts to restructure non-performing loans. In this regard, an adequate legal and implementation framework for debt restructuring will be key. In parallel, efforts also need to continue on strengthening bank supervision and regulation.

On fiscal policy, the authorities’ 2014 budget remains conservative and in line with program targets. Continued prudence will be called for in its implementation.

At the same time, structural reforms will need to continue. Steps need to be taken to advance the privatization agenda. Revenue administration reform has started and will need to be carefully implemented to maximize the efficiency of revenue collections. And efforts need to continue to finalize the design and implementation next year of the welfare reform aimed at providing adequate public assistance to all in need, especially given the difficult economic conditions.

All in all, program implementation has been strong. But given risks ahead, continued full and timely implementation of the program remains essential.

QUESTIONER: I would like to ask about the privatization plan that the government should present in the next Eurogroup meeting. If the deadline is December 8, they can't take the next money from the program.

MS. VELCULESCU: The authorities have committed to present a privatization plan as soon as it is ready, with the objective to raise 1.4 billion euro through 2018, as well to as increase economic efficiency by transfering resources from the public to the private sector. This will need to be done through careful implementation and also an adequate legal framework that will need to be put in place over the next several months.

As to program disbursements, these depend on assessment of the mission’s conclusions by the Executive Board of the IMF, the ESM Board of Directors, and the Eurogroup. On the basis of their assessment of progress in all areas, including privatization, decisions will be made by the respective boards on next disbursements.

QUESTIONER: I'm just wondering if you could review the numbers in terms of expectations for contractions for this year and next year? I just want to make sure I have the numbers right.

MS. VELCULESCU: As noted earlier, we have revised growth projections up from -8.7 percent this year to -7.7. And we have revised the 2014 projections down to -4.8 percent in 2014.

QUESTIONER: What had they been for 2014 before?

MS. VELCULESCU: They were -3.9 percent. Our revision is of about 1 percentage point for 2013 and 2014 in opposite directions. It amounts to a shift from one year to the next, given a more protracted deleveraging that we see in the data. As I have said earlier, over a two- to three-year period, the cumulative contraction has remained largely unchanged.

QUESTIONER: Can you give me a few more details about the contraction that you're seeing in the job market?

MS. VELCULESCU: You will see all the numbers in more detail in our report, which will be published in December. Broadly speaking, we have not dramatically changed our projections on the labor market.

QUESTIONER: I just wanted to ask when the next disbursement is going to be and how much it will be?

MS. VELCULESCU: As I have mentioned before, the review of the program will be assessed by the Eurogroup and the ESM Board, as well as by the IMF Board around early- to mid-December, and disbursement will take place thereafter based on the respective decisions of these boards. We expect an IMF disbursement of around 86 million euro for every review, so it will be a similar amount for this one. And for the ESM, the disbursement is expected to be around 100 million euro this time.

MS. GAVIRIA: We end this conference call here. Thank you very much.


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