By Stelios Orphanides
The European Commission said Cyprus’s economic growth offers an opportunity for the island to address “excessive imbalances” by re-embarking on the reform process which was put on hold two years ago.
The imbalances include “high levels of public, private and external debt, a large negative net international investment position and a high stock of non-performing loans,” which are a “key vulnerability” of banks suppressing credit supply, the commission said in on Wednesday in the 2018 European Semester country report.
Cyprus is one of the three EU economies facing excessive imbalances. The other two are Italy and Croatia.
“Unemployment is also declining but remains high, in a context of weak potential growth. Amid positive macroeconomic developments, a renewed reform momentum in key areas could help improve potential growth, reduce vulnerabilities and the risk of a slowdown, should the external environment and financial conditions become less supportive,” the report said.
In 2018, economic growth is forecast to remain strong but decelerate to 3.2 per cent the 72-page report said, adding that last year’s progress in implementing recommendations was limited, with the exception of the adoption of legislation to introduce the national healthcare system in June.
Other growth enhancing reforms could focus on the areas of the insolvency and foreclosure frameworks, the judicial system, the business environment, the public sector, education and the labour market and privatisations to improve the business environment.
The Cypriot economy expanded last year a projected 3.9 per cent after growing in 2016 3 per cent helping reduce the unemployment level 9.8 per cent in January.
The better-than-expected performance of the economy and public finances allowed the generation of a €361m fiscal surplus on a cash basis last year and the reduction of public debt below 100 per cent of economic output. In November, non-performing loans stood at €21.1bn or 43.7 per cent of the total while private sector debt stood at 250 per cent of the economy at the end of September.
The onloading of real estate by banks as part of loan restructurings including debt-to-asset swaps resulted in an increased exposure to the property market, while banks continue to face uncertainties concerning the sustainability of their “(debt) reduction strategies, as loan re-defaults and re-restructuring remain high”, the commission said.
Debt recovery in Cyprus is slow as contract enforcement remains weak and application of foreclosure and insolvency legislation limited. This is also resulting in limited progress in reducing delinquent loans, the commission said. Furthermore, while public debt is falling, it still remains high rendering the economy vulnerable to external shocks.
“Significant reliance on corporate income tax revenues and the presence of tax planning businesses exposes the country to changes in international tax systems,” the commission added.
“Key public-sector reforms are pending, notably those concerning public administration, local government and state-owned entities,” the report said. “Some measures have been taken or announced to improve the efficiency of the judicial system, but a more comprehensive reform is still at an early stage.”
While “administrative measures have been taken to reduce the backlog in issuing title deeds” this was not a structured solution in addressing inadequacies in the property transaction system, the report continued.
“Concrete steps were taken to increase the capacity of the public employment services, while only limited progress was made on education,” the commission said.