Fishermen untangling their nests in Paphos, Cyprus: The country carried out a considerable economic adjustment while keeping those most in need out of deep water (photo: Friedel Gierth/dpa/Corbis)
Interview with Mission Team
While congratulating Cyprus for its impressive policy achievements over the last three years, the IMF pointed to pending tasks: tackling non-performing loans, reducing public debt, and completing growth-enhancing reforms.
IMF Survey sat down to discuss the outcome of the program with the current Cyprus Mission Chief Rachel van Elkan, as well as Senior Economists Alejandro Hajdenberg and Alejandro Simone, and Resident Representative Vincenzo Guzzo, who were closely involved in the program since before its inception in 2013.
IMF Survey: Cyprus cancelled its program on March 7. What are the main achievements of the program from the IMF’s perspective?
van Elkan: The IMF arrangement had two main goals: to put the banking sector on a sound footing and to return public finances to a sustainable path. Both of these objectives were met. Positive growth returned earlier than expected, already last year, despite the large fiscal consolidation. As a result, unemployment has begun to fall. Significant institutional and legal improvements were also introduced, which will help ensure that Cyprus can avoid similar economic hardship in the future.
Simone: On the fiscal front, the Cypriot authorities carried out a strong fiscal adjustment under difficult economic circumstances. At the same time they also took care of the most vulnerable by adopting a well-targeted income support scheme. As a result, while overall public spending was reduced, the vulnerable received adequate assistance. In addition, new legislation modernized the budget process, strengthened accountability for public spending, and established medium-term fiscal planning. The authorities also made tax collection more efficient and equitable.
Hajdenberg: Impressive progress was also achieved in the banking sector. Capital positions and liquidity have been restored. New foreclosure and insolvency rules encourage banks and borrowers to come together to find workable solutions for unpaid loans. The system for issuing and transferring real estate title deeds was changed to finally address the long-standing problem of assigning full ownership rights to buyers who have paid for their properties.
IMF Survey: What crucial tasks remain for Cyprus?
van Elkan: Cyprus has gone from the acute care stage and is now well into the recovery phase. The program equipped it with the appropriate tools; which now need to be vigorously applied to reform the economy and build resilience. In the banking sector, the ratio of non-performing loans (NPLs) remains very high at 60 percent, equivalent to 150 percent of GDP. Public debt, at just over 100 percent of GDP, is also a vulnerability. Encouragingly, Finance Minister Harris Georgiades has committed to maintain prudent policies and to continue to implement reforms after the program period.
Hajdenberg: It is also critical to further reduce the unemployment rate, which stands at over 15 percent. And the most effective way to create jobs is by implementing growth-enhancing structural reforms which keep the output growing.
IMF Survey: The European Stability Mechanism (ESM) and the IMF made available to Cyprus €9 billion and €1 billion under their respective programs. What were the differences between the two programs?
van Elkan: The IMF and ESM programs were very closely aligned in terms of their main objectives and conditionality, and there was good collaboration between us and the staff of the European Commission and the European Central Bank. This allowed us to speak with a single voice and to be more effective.
Simone: This way the different teams could concentrate on their own areas of expertise and could complement each other well. For example, the IMF focused on financial and fiscal policies, which aligned with our core program objectives, while the European institutions also handled structural policies including privatization, health reform, competition, and labor markets.
IMF Survey: Global prospects are a bit wobbly. Financial markets are volatile, and growth in the Euro area is sluggish. How will Cyprus cope in these circumstances?
van Elkan: Cyprus regained access to international financial markets barely 16 months after the crisis and has successfully issued debt three times since then. That puts the country in a good position. Nonetheless, Cyprus is a small open economy, and is therefore dependent on external demand and capital inflows from abroad.
The message is very clear: the country should work to build more resilience and flexibility. This reinforces the need to shore up the banks by continuing to work down the large stock of NPLs, and to maintain primary fiscal surpluses to lower public debt. Another important task for Cyprus is to continue to carry out its privatization strategy.
Simone: In the fiscal arena, the pending reform of the public administration is particularly important. One of its goals is to ensure that the wage bill does not once again outpace the overall economy as it did before the crisis.
IMF Survey: The Greek- and Turkish-Cypriot communities are currently in negotiations to find a solution to the Cyprus issue. The IMF is providing technical advice on the economic and financial aspects of the process. Do you already have an estimate of how settlement could benefit the economy of a united Cyprus?
Guzzo: The IMF was asked to assist the two communities in this process. Work is underway in a range of areas that are core competencies for the Fund, including developing macroeconomic and fiscal frameworks for a united Cyprus. We are also working on integrating public finances through an efficient federal structure, assessing the health of the financial sector, developing a strategy for the euro changeover in the Turkish-Cypriot community, and constructing a reliable set of integrated macroeconomic statistics.
Several missions have already taken place. Our work is aimed at supporting the two communities in their efforts to reach an economically viable solution that will encourage trade and investment and raise long-term growth.
