The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Cyprus’s performance under an economic program supported by a three-year, SDR 891 million (about €1 billion) extended arrangement under the Extended Fund Facility (EFF). The completion of this review enables the disbursement of SDR 74.25 million (about €84 million), which would bring total disbursements under the arrangement to SDR 371.25 million (about €420.2 million). The Executive Board also approved the modification of end-June fiscal performance criteria.
In addition to the IMF’s extended arrangement, approved on May 15, 2013 (see Press Release No. 13/175), Cyprus’s economic program is supported by financial assistance from the European Stability Mechanism (ESM) amounting to €9 billion. The program is intended to stabilize the country’s financial system, achieve fiscal sustainability, and support the recovery of economic activity to preserve the welfare of the population.
Following the Executive Board’s discussion, Ms. Christine Lagarde, IMF Managing Director and Chair, said:
“The Cypriot authorities are to be commended for their achievements during the first year of their economic program. They recapitalized and restructured the financial sector, removed domestic payment restrictions, implemented an ambitious fiscal consolidation, and initiated important structural reforms. As a result, macroeconomic and fiscal outturns have been better than expected, and Cyprus recently re-accessed international capital markets. Looking ahead, challenges and risks remain, and full and timely policy implementation will be critical to the program’s continued success.
“Building on the progress made in strengthening the financial sector, efforts should focus on addressing the high level of non-performing loans, which is hindering the provision of credit and the resumption of growth. Swift implementation of the new debt-restructuring legal framework is essential to provide adequate incentives to voluntary loan workouts. The authorities also need to intensify supervisory monitoring of banks’ loan restructuring efforts, further strengthen overall supervision and regulation, and fully implement the anti-money laundering framework.
“The full elimination of domestic payment restrictions has helped to support activity and strengthened confidence. Further progress with restructuring and normalizing banks’ liquidity and funding will be needed to allow the removal of external capital controls while safeguarding financial stability. Adequate provision of liquidity by the Eurosystem remains essential.
“The authorities’ ambitious fiscal consolidation and prudent budget execution have helped reduce the fiscal deficit. Given lingering macroeconomic uncertainty, the authorities should continue to implement the budget cautiously. Further well-paced fiscal adjustment is needed in the medium term to ensure debt sustainability. Fiscal efforts should be complemented by structural reforms to protect vulnerable groups, modernize the revenue administration, strengthen debt and fiscal risk management, and privatize state-owned assets,” Ms. Lagarde said.